he trial of KPMG executives charged with creating and marketing illegal tax shelters has been delayed. 13 accused executives had all charges dropped after a judge recently ruled that it was illegal for the government to pressure KPMG to not pay the legal fees of the 13.In this latest twist, the trial is being delayed because of a claim that one of the defense lawyers has a conflict of interest. Judge Lewis Kaplan delayed the case (that was to begin on Tuesday) and removed Steven Bauer of Latham & Watkins, who was representing John Larson.
Larson did not waive his right to have an attorney without a conflict of interest. The alleged conflict came about because Bauer was the attorney for David Makov, formerly charged in the case. Makov is going to testify for the government in the case, so this may be a conflict in representing Larson.
A deferred criminal charge against KPMG related to the sales of tax shelters has been dismissed by a federal judge. In August 2005, a deferred prosecution agreement was agreed to by the parties in the case against KPMG, which accused the audit firm of creating and selling the tax shelters to help people avoid paying U.S. income taxes.
Under the deferred prosecution agreement, KPMG paid a $456 million fine, submitted to outside monitoring, and gave up some of its tax businesses. The agreement called for the government to dismiss the deferred charges if KPMG was in compliance through December 31, 2006.
Had KPMG been indicted for those charges, it might have led to the firm’s demise. In the agreement, KPMG admitted being involved in a conspiracy to defraud the U.S. government and the Internal Revenue Service.
While the firm is off the hook, 17 former KPMG executives were criminally charged with fraud and tax evasion related to the tax shelters. One has pleaded guilty and the others are expected to be on trial in September. Jeffrey Stein, the former deputy chairman of KPMG, opposed the dismissal of the charges against KPMG.
The first civil case over the tax shelter called “Son of Boss” went in favor of the IRS. Tax Court Judge David Laro granted summary judgment to the IRS in its case against RJT Investments X LLC in Omaha, Nebraska. The IRS argued that RJT created fake losses in order to lower its federal taxes.
The IRS has already settled with 1,200 businesses for $3.8 billion in taxes, interest, and penalties. This settlement was less than the maximum allowed by law. Another 600 taxpayers involved with the shelter were warned that if they did not accept the settlement, they would be assessed full taxes and penalties.
A criminal trial is upcoming for 18 individuals related to sales of tax shelters by KPMG LLP. 16 of those 18 are former KPMG executives. KPMG itself has agreed to deferred prosecution and a $456 million fine for its role in structuring and selling the illegal tax shelters.
RJT will owe millions in penalties and taxes.