New York (Aug. 11, 2004) -- A senior auditor for the Internal Revenue Service says that the agency made a secret deal with a Silicon Valley company suspected of underpaying its taxes, according to published reports.

IRS senior auditor Remy Welling says that rather than tax returns to examine, the file she received on San Jose, Calif.-based Micrel contained an agreement to close an audit on the semiconductor maker before it had even begun, The New York Times reported.

Welling reportedly told the paper that she was asked to sign off on a deal worked out by IRS officials that would ultimately allow Micrel and its top executives to escape at least $51 million in additional taxes that she was convinced they should've paid. The agreement also reportedly required the IRS to cooperate with the company in keeping its shareholders uninformed on some terms of its stock option plan, which Welling said enriched the four top executives by as much as $20 million in total.

According to the report, Welling risks going to jail for bringing the issue to public attention, since revealing information about an audit can open an agent to criminal prosecution. Welling reportedly told the Times that she expects to be fired for going outside the agency by taking her complaint to the FBI and the Securities and Exchange Commission.

The Times said that IRS officials declined to discuss any aspects of Welling's case or the agreement with Micrel Inc. citing privacy concerns, but insisted that there are IRS procedures to protect the corporate tax collection process against misconduct.

"It is essential that we maintain the independence and integrity of the audit process,'' IRS Commissioner Mark W. Everson told the Times. "The IRS has long-established standards and safeguards designed to ensure that there is no undue influence over decisions by our enforcement personnel.''

Welling reportedly protested that the closing agreement, which would have settled the stock option matter, could be considered only after Micrel's full tax returns had been examined, but claims she was pressured and harassed to sign off on the audit.

According to the Times, this marks the third time in a decade that details of a corporate audit have become known, all of them in cases where longtime IRS auditors said that they found extensive tax evasion. In all three cases, the Times said, the auditors were overruled after meetings between senior IRS officials and former officials of the agency who had gone to work at accounting and law firms.

According to the Times, Micrel is suing its former accountants, Deloitte & Touche, over the stock option pricing matter. Deloitte reportedly denied any wrongdoing in its filings.

-- WebCPA staff

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