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Last updated on April 18, 2014 at 21:21 EDT

Tax shelters in retreat, for now, on U.S. crackdown

August 30, 2005

By Kevin Drawbaugh

WASHINGTON (Reuters) – The tax shelter business — a
shadowy field where accountants, lawyers and bankers help rich
clients dodge taxes — is retreating in the face of a U.S.
government crackdown, but experts say it is only temporary.

Tax shelter promoters are certain to find new loopholes —
possibly in the areas of foreign tax credits or financial
derivatives — to replace the phony-tax-loss types of shelters
now being rooted out by authorities, they say.

“If you shut down one set of loopholes, new ones will be
found,” says Martin Sullivan, contributing editor for Tax
Notes, a journal published by the nonprofit firm Tax Analysts.

At the moment, Sullivan says, professionals who develop and
sell shelters are not only seeing some loopholes closing, they
are also skittish about legal exposure.

In the largest criminal tax case ever filed, Big Four
accounting firm KPMG on Monday admitted to criminal wrongdoing
and agreed to pay a $456 million penalty related to tax
shelters that it sold between 1996 and 2002.

Eight former executives of the firm and a lawyer at a top
New York law firm were indicted separately on criminal charges
related to their involvement in the KPMG shelters.

A former banker for Germany’s HypoVereinsbank, Domenick
DeGiorgio, earlier this month pleaded guilty to tax fraud
charges. He managed HVB’s dealings with KPMG shelters.

Further legal action is expected from the continuing tax
shelter investigations. In the face of this, shelter promoters
are pulling back.

“There’s too much exposure now,” says Jay Soled, associate
professor at the Rutgers Business School.

KPMG has agreed under its deferred-prosecution settlement
with the U.S. Justice Department to close two tax practices,
including one that sells tax advice to rich individuals.

Other firms have largely stopped promoting shelters. But
that does not mean the shelter business is dead. Far from it,
says Lee Sheppard, also a Tax Notes contributing editor.

“Tax shelters go in waves. We may not see another wave for
a while,” she says. “If the (Internal Revenue Service) and the
Justice Department manage to keep prosecutions in the papers
for a while, that will stop some people.”

The annual cost to taxpayers of tax shelters is about $10
billion, Sullivan estimates. That is the amount of money that
should go into federal coffers, but does not due to shelters.

The IRS is getting more aggressive on shelters, says
Sheldon Pollack, professor at the University of Delaware.

But he adds: “I wouldn’t say they’ve won the war.”

The KPMG shelters at the heart of this month’s legal
proceedings carried acronyms such as BLIPS (bond-linked issue
premium structure), FLIP (foreign leveraged investment program)
and OPIS (offshore portfolio investment strategy).

Each used a series of complex deals to generate hundreds of
millions of dollars in phony losses for taxpayers, allowing
them to dodge billions of dollars in taxes, authorities say.

While the IRS is moving against such structures, tax
experts say future abuses could come in the area of foreign tax
credits.

“There’s opportunity there for sophisticated tax planning
to game the system,” Soled says.

Partnership tax law — while central to some of the recent
shelters — remains vulnerable in some areas, Sheppard says.

“There are many partnership tax rules that are vague and
many that are not vague but vary from the economic reality,”
she says. “Another area of vulnerability is derivatives, which
the tax law does not know how to handle.”