December 18, 2018

Ernst & Young Admits That Some of Its Partners Were Running a Tax Shelter Factory

What a fine thing for the Manhattan U.S. Attorney to announce on a Friday afternoon that it had reached at settlement with Ernst & Young over its tax sheltering activities:

Ernst & Young LLP will pay $123 million to settle a U.S. tax-fraud probe as part of a non- prosecution agreement, according to a statement from the Manhattan U.S. Attorney’s Office. The accounting firm “admitted wrongful conduct” by its partners and employees in connection with four tax shelters, from 1999 to 2004, according to today’s statement. About 200 Ernst & Young clients used the shelters to try to avoid more than $2 billion in taxes, it said. In addition to the money and the admissions, Ernst & Young agreed to a series of permanent restrictions on its tax practice and will continue to cooperate with the government’s tax-shelter investigation. The firm’s cooperation began in 2003, according to the statement.
Those restrictions include not doing things that the IRS considers to be a "tax avoidance transaction." But what about the rest of the statement? Well, here's the whole thing and it has all the interesting details that the 
A small group within E&Y known as the Strategic Individual Solutions Group (“SISG”) was primarily responsible for supervising and coordinating the marketing, implementation and defense of E&Y’s tax shelter products. Certain SISG tax shelter products were designed to appear to the IRS to be substantive investments that had favorable tax consequences when, in reality, the products were actually designed and marketed to clients as a series of preplanned steps that would defer, reduce or eliminate their tax liabilities. The typical client participating in these shelters was primarily, if not exclusively, motivated to achieve a desired tax savings.
 
In order to deceive the IRS as to the true nature of the tax strategies, and to bolster arguments that the transactions had economic substance, some SISG personnel agreed upon and directed other E&Y employees to participate in a concerted effort not to create, disseminate, or publicize documents reflecting the tax motivation behind the strategies, or the preplanned sequence of steps necessary to effect the strategies. 
If any of this sounds familiar, it's because it sounds a lot like the settlement that KPMG reached with the DOJ back in 2005 over its tax shelter products that helped clients dodge $2.5 billion in taxes. The main difference being that KPMG entered into a deferred prosecution agreement rather than a non-prosecution agreement. Why? Well, my hunch is that in E&Y's case, senior management was not involved as they were alleged to have at KPMG. How did I get this hunch? Hilariously enough, E&Y tells us!
 
Buried deep in the NPA is Ernst & Young's resolution of its board of directors. In that document is a "Statement of Facts" where the firm asserts the following:
 
KPMG? BDO? Unfortunately, it doesn't say explicitly, but it is a nice little dig.
 
Of course the other interesting twist here is that E&Y quickly agreed to cooperate with the government, as early as 2003 when the tax shelter products were still being offered. What's not so clear, however, is why it would take so long to reach a settlement — they've been cooperating for ten years and they finally got around to it? And who are all these "partners and employees" are and what their statuses are with the firm? We know who some of them are, but you'd think that a firm so anxious to hang people out to dry wouldn't be so chintzy with the names.  

MANHATTAN U.S. ATTORNEY ANNOUNCES AGREEMENT WITH ERNST & YOUNG LLP TO PAY $123 MILLION TO RESOLVE FEDERAL TAX SHELTER FRAUD INVESTIGATION [DOJ]
Non-prosecution agreement [DOJ]
Ernst & Young to Pay $123 Million to End Tax-Fraud Probe [Bloomberg]
Ernst & Young to pay $123 million to resolve U.S. tax shelter probe [Reuters]

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