Fraudulent tax shelters continue to be a target not only of IRS Whistleblower claims, but also of enforcement actions.

We have followed closely the KPMG tax shelter fraud case in this whistleblower lawyer blog. The trial of four defendants ended this week, with two former KPMG partners and one attorney convicted of multiple counts of tax evasion for their roles in the bogus tax shelters. Another lawyer defendant was acquitted.

Prosecutors alleged that KPMG officials offered wealthy clients illegal offshore tax shelters, and paid outside attorneys to give the bogus shelters the appearance of legitimacy. According to the government, the investments had no real risk, and generated “paper losses that allowed the accounting firm’s clients to offset income.

Through tax shelters with names such as BLIPS, FLIP and OPUS, the clients were able to claim falsely that they had taken sizeable loans to buy stock, according to the government. Clients allegedly paid fees equal to 7 percent of the amount of losses sought.

After a two month trial, former KPMG tax partner Robert Pfaff, former KPMG senior tax manager John Larson, and attorney Raymond J. Ruble were found guilty on multiple counts of tax evasion. Another former KPMG tax partner was acquitted on the five counts of tax evasion.

The accounting firm agreed two years ago to pay $456 million to resolve the allegations against the firm itself. Guilty pleas previously were entered by the government’s chief witness, David Amir Makov, former KPMG partner David Rivkin, and former HVB Group accountant Domenick DeGiorgio.
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On the same grey November day when President Bush visited Wall Street’s Federal Hall to address the ever-morphing “bailout,” I was in lower Manhattan meeting with IRS officials about an IRS Whistleblower matter. The tax evasion scheme we discussed was yet another that has cost taxpayers dearly.

As NYPD officers scurried about to help protect the President that day, I wondered who and what would protect our taxpayer funds–the hundreds of billions the government was now about to dole out–from fraud and abuse.

Fraud is rampant, as proven by the evidence brought to light by so many of our whistleblower clients under the qui tam statute, the False Claims Act, and now under the new IRS Whistleblower Program.

A few days later, Sen. Chuck Grassley hammered the same point in a November 17, 2008 letter to Treasury Secretary Paulson and Attorney General Mukasey. Grassley has insisted on effective oversight of the Troubled Asset Recovery Program (TARP) and the Capital Purchase Program (CPP), as well as on encouraging “whistleblowers” to come forward:

In the meantime, taxpayer dollars are at risk and I believe it is important to discuss alternative procedures and measures that can be taken to ensure taxpayers aren’t taken to the cleaners by unscrupulous individuals. One proven and effective method of overseeing taxpayer funds has been to support courageous whistleblowers who risk their jobs and livelihoods to bring forth allegations of fraud, waste, and abuse of taxpayer monies. As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated. As such, I believe you should both work to ensure that all entities participating in the TARP and CPP are made aware that any allegations of fraud, waste, or abuse will be treated seriously and properly referred to the Treasury Inspector General or the Attorney General for review until a Special Inspector General for the TARP is appointed.

Grassley also emphasized the importance of the False Claims Act, the nation’s primary civil weapon for combating fraud against taxpayer funds, in preventing and penalizing fraud in the bailout:

[E]ntities who receive federal funds under the TARP and CPP are subject to the provisions of the FCA should they use false or fraudulent submissions in order to obtain federal funds. For instance, any entity that submits false or fraudulent information in an application to Treasury in order to obtain federal funds available through the CPP would be liable to the Government under the FCA. Further, while it has been reported that the Treasury does not currently plan to utilize authority under the Act to use the TARP to purchase distressed assets either directly or indirectly, should Treasury exercise its authority to do so, any fraudulent statements or submissions made to induce the Government to purchase those assets would also subject the fraudfeasors to liability. As a result, these individuals and corporations could be subject to civil penalties and treble damages for committing fraud against the Government.

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