The U.S. Internal Revenue Service has said Ernst & Young will pay $15 million to end a probe of its marketing of tax shelters, allowing the accounting firm to close one chapter in the controversy over tax advice it has provided over the years.
Under the agreement with the IRS, Ernst & Young will also carry out several initiatives as part of a program aimed at ensuring compliance with the prescribed rules. The agency also will be able to review Ernst's compliance and review documents prepared under the program.
“This is an admission that the accounting firms have been doing something they shouldn't have done,'' said Joseph Bankman, a professor at Stanford Law School, who has researched the hushed world of tax shelters. He argues that promoters of tax shelters don't register them with the IRS as required because there are few buyers for a shelter under scrutiny from the IRS.
The IRS examination, which focused on whether Ernst met requirements for registering and maintaining lists from tax shelters it marketed, is among more than 90 investigations of professional service firms that the agency has opened.
In recent months, accounting firms have been grappling with scrutiny from an IRS crackdown on aggressive tax shelters and a growing list of lawsuits stemming from questionable tax advice and shelters they promoted or sold to clients.
Ernst & Young, in particular, became the poster child for the issue once it was revealed that the firm set up questionable tax shelters that led to the departure of the top two executives at its audit client, Sprint Corp. (FON).
The firm still faces potential liability from lawsuits filed by former clients who claim the accounting firm advised them to enter into illegal tax shelters.
Ernst, which says it has shut down the tax group that promoted the tax shelters in question, in a statement said the settlement underscored its commitment to a good working relationship with the IRS and complements initiatives it is taking.
IRS spokesman Frank Keith declined to say how long Ernst & Young had been under examination, citing taxpayer privacy restrictions. The deal with Ernst is not the first to come out of the IRS crackdown. Last summer, PriceWaterhouseCoopers struck a deal with the IRS and agreed to make a “substantial'' financial payment to settle issues stemming from tax shelter advice it provided to clients.