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The Tax-Shelter Industry's Dirty Little Secret: The Ticker

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By Jonathan Weil

Bloomberg News's Jesse Drucker is out today with a big scoop chronicling how Republican presidential hopeful Mitt Romney presided over Marriott International Inc.'s audit committee during the 1990s while the company used an abusive tax shelter called Son of BOSS. Ultimately the Internal Revenue Service's decision to disallow the shelter was upheld by a federal appeals court in 2009 -- eight years after the IRS initially ruled against Marriott, and 15 years after Marriott first put the strategy in place.

The delays underscore the difficulty for the government of winning these catch-me-if-you-can games. The case also serves as a reminder that the government's prosecutions of abusive tax-shelter promoters have been grossly uneven.

In 2003, Senator Carl Levin and the Democratic staff of the Senate Permanent Subcommittee on Investigations released a landmark investigative report about the tax-shelter industry, focusing on the roles played by law firms, investment banks and accounting firms. However, the scope of that report was limited to abusive shelters, including variants of Son of BOSS, that were sold to wealthy individuals. Numerous former partners from the accounting firms KPMG and Ernst & Young were later indicted. Some were convicted. KPMG itself admitted to criminal conduct in 2005 as part of a deferred-prosecution agreement with the Justice Department, under which the firm paid $456 million in fines and restitution.

The dirty little secret about those investigations was that many large companies, including clients of KPMG and the other Big Four audit firms, also were using the same kinds of tax shelters -- only the government never called them out publicly. Large corporations, of course, are the biggest source of campaign funds for members of Congress.

There have been no commensurate congressional or Justice Department investigations into the nasty tax schemes that accounting firms and other professional advisers sell to their corporate clients. The real crime, for those partners who were unlucky enough to be sentenced to prison, was that they peddled their services to rich people rather than to large multinationals -- which is where the biggest dollars are, in terms of advisory fees and lost revenue for the Treasury Department.

Just maybe if the Justice Department prosecuted corporate tax evasion more often, the government wouldn't need to collect as much money from the rest of us.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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-0- Feb/23/2012 22:08 GMT