Deterrence, fairness and KPMG

I'm gradually surfacing from a sea of obligations that has gotten in the way of blogging. I note that the WSJ has an editorial roundup about KPMG reviewing the recent evidence about IRS uncertainty in 2004 that the KPMG shelters needed to be registered, a 2003 KPMG memo citing IRS Acting Chief Counsel Emily Parker as telling KPMG "that there has been no criminal activity" in KPMG's marketing of the tax shelters, and reiterating Judge Kaplan's rulings on violations of defendants' constitutional rights in the case (see, e.g., here). Tom Kirkendall also has the story.

This case neatly puts into focus two views of corporate criminal liability. I have said that "the tax shelters in the case pose a particularly complex problem of drawing the line between criminal behavior and simply aggressive and ultimately unsuccessful tax planning that is similar to what tax advisers do everyday."

This sort of reasoning draws fire from those who assert the need to deter corporate wrongdoing. Here, for example, is an excerpt from Calvin Johnson, Tales from the KPMG Skunk Works: The Basis-Shift or Defective-Redemption Shelter, Tax Notes, p. 431, July 25, 2005:

KPMG is a ‘‘bad man’’ under Oliver Wendell Holmes Jr.’s meaning of the term. Holmes has told us, famously, that the law must be written under the assumption that it will need to shape bad men. . . .

Unfortunately, as a matter of strict economics, the penalties needed to make it in the self interest of the bad man to report tax accurately are rather high. The audit rates are low and IRS auditors do not catch every issue they should beat. The penalty necessary to make it in the interest of a bad man to report tax accurately with only a 1 percent chance of correction must be a no-fault penalty of 100 times the deficiency or 10,000 percent. Jail time for underreporting tax also reduces the monetary penalty we would need to impose to keep the bad man in rein — professionals tend to be easily deterred — but criminal penalties are not all that likely. Minor penalties, say on the order of 10 percent or 20 percent, are not going to do it. With penalties at the 10 percent to 20 percent level, the bad man is going to win this war.

Yes, jail time is a nice deterrent. But we are starting to see the costs of this approach.

Comments

[save_the_rustbelt]

This does not appear to have been a gray area tax shelter for avoidance, this appears (from most public info) to have been intentionally way over the line.

Cause? Greed.

(Big 4 CPAs are sometimes envious of the big bucks earned by Wall Street lawyers and money men - can cause bad judgment.)