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August 24, 2005

Tax Analysts reports this morning that the Justice Department Tax Division has given the go-ahead for indictments of "most" of the 22 ex-KPMG partners who had been identified as targets. From the story:

The individual indictments, which have to be presented to the grand jury that has been investigating KPMG’s shelter involvement for the past 18 months, are likely to be announced Thursday, according to lawyers familiar with the cases. But the “tail wagging the dog” is when the deferred prosecution agreement with the firm is ready, according to one lawyer.

The government’s lead charge against the former KPMG partners is that they conspired to defraud the IRS, according to lawyers involved.

The government’s chief witness is likely to be Domenick DeGiorgio, the former banker with the German bank HVB, who earlier this month pleaded guilty to wire fraud, tax evasion, and “tax shelter fraud conspiracy,” charges related to his involvement in promoting the tax shelter transactions known as bond linked issue premium structures, or BLIPS, which were sold to KPMG clients.

The subscriber-only version of the story hints at the likely defense:

Not only is DeGiorgio's credibility suspect at the outset because of his personal problems, but much of the information he provided that the government is relying on regarding the transaction's profit potential and the investors' income tax returns is not based on DeGiorgio's own knowledge, said one defense attorney.

Furthermore, conspiracy thrives on secrecy, argued another criminal defense lawyer. The BLIPs product at issue was approved after a very long, deliberative process among a number of lawyers and accountants at KPMG, the lawyer explained. "If the intention from the beginning had been to scam the IRS, it would never have made any sense to have all those people involved."

The indictments are tied to a deal that would enable KPMG itself to avoid prosecution. KPMG's cooperation may be the Governments trump card in prosecutions of the former partners.

We don't much care for KPMGs tax-shelter practices. Still, the prosecutions are scary to all tax practitioners. If the Justice Department goes ahead with indictments, we hope that it has evidence of criminal behavior, rather than, say, malpractice.

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