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Article Summary Essay

1775 words - 8 pages

AbstractThis paper will discuss a business dispute between KPMG and the IRS. It will identify the "legal issue in dispute" as well as the legal process that was used to resolve the issue, and "how that process fits into the court structure" (Augenstein). Then, it will explain the civil and criminal aspects of the dispute. The paper will "compare and contrast possible outcomes if the dispute could be heard in both a criminal and a civil case", while addressing the differences between these types of actions (Augenstein).Dispute SummaryOn August 26, 2005, the Justice Department and KPMG settled their longrunning dispute over KPMG's aggressive tax shelters. After over seven years of legal ...view middle of the document...

A civil case can be filed alleging negligence can be filed against an accountant who fails to meet his or her obligations under GAAP and GAAS, as well as against the accountant's firm. A civil action can result in substantial penalties, and may include both compensatory and punitive damages. Federal law also provides for criminal penalties for violating accounting standards. The 1976 Tax Reform Act "imposes criminal liability on accountants and others who prepare federal tax returns" (Cheesman). This criminal liability extends both to individuals and companies, although the federal government has not usually brought charges against partners in the past. In the case of abusive tax shelters, it has often been difficult for court's to "draw sharp lines between legitimate tax planning and illicit shelters", as "most abusive shelters are based on legal tax-planning techniques- but carried to extremes" (Business Week). However, a finding of criminal liability on the part of an accounting firm could lead to substantial monetary damages and for all intents and purposes could put a firm out of business. In the case of an individual, a finding of criminal liability could result in monetary damages and even jail time.Let us now return to the specifics of the KPMG case. Much as in the case of Arthur Anderson, it was the lure of profits that tempted KPMG to violate its fiduciaryduty to use "reasonable care, knowledge, skill, and judgment" (Cheesman). KPMG became increasingly aggressive throughout the 1990's in its implementation of taxshelters. The government alleges that KPMG crossed the line between 1996 and 2003, committing "tax-shelter fraud by selling illicit deals and then misleading the IRS aboutthe transactions" on behalf of wealthy individuals (Business Week). KPMG created tax shelters that were "allegedly designed to create phony losses that investors could use to reduce their taxes" (Business Week). The IRS maintains that these tax shelters are illegal, but "the courts have not yet ruled on the matter" (Business Week). The IRS uses the economic substance test to evaluate the legality of tax shelters. This doctrine holdsthat tax shelters are improper if they are "done solely to reduce taxes" (Business Week).However, federal courts have not consistently ruled in favor of the IRS on such matters, sometimes allowing tax shelters "even if they carry no economic risk or opportunity for reward beyond their tax savings" (Business Week).The past reluctance of the courts to take a definitive stance on aggressive tax shelters may have contributed to KPMG's current problems. When the IRS began investigating KPMG, it responded largely by stonewalling. The company "filed scores of procedural documents supporting KPMG's assertion that it did not need to turn over thetax shelter documents" (New York Times). In fact, "they were so effective at resisting the requests" that by July 2002 "the Justice Department had filed a civil lawsuit against the firm seeking to...

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