GMS 802 Case study 1 PDF

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KPMG’s Tax Shelter Business...

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Case 1: KPMG’s Tax Shelter Business GMS802

In the ’90s, KPMG, one of the world’s big four accounting firms had developed and marketed tax shelters to wealthy individuals who wanted advice for tax planning. The major tax shelters included OPIS, SC2, BLIPS & FLIP, and were designed to create paper losses for investors and ultimately avoid paying taxes. This resulted in a win for the clients and KPMG. The client’s saved over 11 billion in tax deductions together and KPMG generated more than 115 million in fees but the government lost $2.5 million in tax revenue. KPMG chose not to register the products with the Internal Revenue Service (IRS) that later declared these tax shelters illegal. IRS later said their losses were fake and risk-free to the clients and were designed solely to reduce taxes. Furthermore, KPMG figured that it would be cheaper to pay the penalties than to pay for the fees of each shelter sold.

As this case examined KPMG’s tax shelter business and the unethical practices the company participated in to avoid taxes, it has violated the “Honesty” & “Integrity” principle for ethical reasoning. As tax planning is critical and essential to the accounting services, it can also be self-assessed and you are to be ethical when submitting reports. It is legal for companies to tax-plan and ensure clients do not have to pay more than necessary but tax evasion where you find loopholes or forge or your financial statements to avoid paying taxes is illegal. Taxes are revenue to be collected by the government to fund services in proportion to receive goods and services. This includes healthcare, education, highways where you ultimately contribute to your own area of living. The government taxes people based on how much they are able to pay and this usually results in different opinions about how much a wealthy person should pay. The wealthy argue that everyone should get taxed the same amount and progressive taxes which states that “as income increases, the amount taken in taxes increases” (such as federal income tax) should not be implemented and this usually results in people trying to find loopholes to

avoid it. In this case, the clients and KPMG were not honest and lacked integrity with their tax reports. The dilemma here is that the clients purchased the tax shelters and engaged in illegal actions while being fully aware of the penalties and did so because the amount in penalities was less than what they would have to pay back in taxes. They were also aware of the liability issues but still failed to register its tax shelters with IRS. The company was fully aware of the conflicts that could arise but still went through with the decision to offer these services for their own greater good which is morally unacceptable. Not only does this violate the integrity & honesty principle, but all 7 of them.

The actions in the “KPMG’s Tax Shelter Business” case took place in the 1990s but the same concept of tax evasion unfortunately still happens to this day. You may ask “why should we care?” When the wealthy avoid taxes, the poor pick up the bill. The government still needs the money at the end of the day to function, and they retrieve what they loose from the wealthy by taking it out of the pockets of the less wealthy. This system exploits the less fortunate who struggle to meet their ends meet. Even when you see people doing good by giving money to a charity, you don’t know if its because they genuinely care or if it’s just to write it off in taxes. Overall, I believe the consequences aren’t strict enough. After further researching the case, I read that the US Justice Department didn’t want to shut the firm down under these charges as it would cause a lot of employment losses. So ultimately it was a win-win situation for KPMG as they didn’t have to pay half the amount they helped their clients save and didn’t have to suffer any major legal consequences which would destroy the firm and ultimately fixed their reputation over the years.

References:

Boatright, John Raymond, and Jeffery D [VNV] Smith. Revel For Ethics And The Conduct Of Business Access Card.

“KPMG Tax Shelter Fraud.” Wikipedia, Wikimedia Foundation, 10 Apr. 2020

“KPMG to Pay $456 Million for Criminal Violations in Relation to Largest-Ever Tax Shelter Fraud Case.” #05-433: 08-29-05 KPMG to Pay $456 Million for Criminal Violations in Relation to Largest-Ever Tax Shelter Fraud Case

Abramson, Larry. KPMG Admits Creating Fraudulent Tax Shelters. 30 Aug. 2005

Breakout Room Discussion ●

Tax Avoidance/Evasion effects the economy as a whole as highways still need to be repaired & the healthcare & education system still needs to be paid for.

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Dignity- They put their employees at risk, as they did illegal activities. They lowered their employee’s reputations from professionals to salesmen. The company as a whole suffered and took years to build back their reputation.

Solution: ●

KPMG knew what they were doing & the illegal activities they participated in. A solution would be to simply not participate in illegal activities.

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Hire third-party organizations to monitor their finances.

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Compensate anyone who lost money or were “scammed” & give back to the community to build back their image....