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Ernst & Young Resolves Tax Shelter Case

July 2, 2003

WASHINGTON (AP) _ One of the nation’s largest accounting firms, Ernst & Young LLP, has agreed to pay $15 million and let tax agents examine its books as part of a settlement that ends an Internal Revenue Service investigation into tax shelters marketed and sold to wealthy clients.

Ernst & Young spokesman Kenneth Kerrigan said the accounting firm admits no wrongdoing. ``We still stand by our advice,″ he said.

The IRS touted Wednesday’s accord as a model for future settlements. The agency has opened more than 90 investigations into tax preparation and accounting firms.

``This agreement constitutes a significant development in our continuing efforts to identify potentially abusive tax transactions,″ said IRS Commissioner Mark Everson.

Sen. Charles Grassley, an Iowa Republican and chairman of the tax-writing Finance Committee, said the agreement underscores the need for stronger tax shelter laws.

``Violating tax shelter rules shouldn’t be a negotiable offense,″ Grassley said. ``I just hope a $15 million penalty is large enough to get their attention.″

The IRS began targeting tax shelters more intensively last fall, part of a program to concentrate its small enforcement budget on the most serious tax avoidance schemes.

This week, the IRS shut down a shelter that some accounting firms marketed to executives as a way to defer paying taxes on stock options. In June, the agency ordered a Chicago law firm to release the names of taxpayers who participated in shelters that shielded at least $2.4 billion from federal income taxes.

Last year, the government filed suit against two other major accounting firms, KPMG LLP and BDO Seidman LLP, seeking documents related to tax shelters. The firms say much of the information is protected by accountant-client confidentiality privileges.

The settlement with Ernst & Young surrounded questions about whether the firm complied with laws that require it to register tax shelters _ any arrangement designed to reduce or minimize taxes _ with the IRS and keep lists of taxpayers who purchase the arrangements.

Ernst & Young will now establish a Quality and Integrity Program to ensure that the company complies with those laws. The IRS will have access to that program’s documents to make sure the firm adheres to those laws in the future.

Mark Weinberger, the firm’s vice chairman of tax services and a former Treasury Department official, said the settlement ``underscores our commitment to having a good working relationship with the IRS.″

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