Justice Department’s Unethical Tax Evasion Case against KPMG Is Falling Apart

Thanks in large part to a punitive corporate tax rate and mind-numbing complexity in the tax code, a lot of accountants and lawyers get rich by figuring out ways to protect shareholder money. This irritates politicians and bureaucrats, who constantly tinker with the law in an attempt to grab more tax revenue (though this effort is offset by politicians looking for campaign cash, which leads to the endless creation of new loopholes). This is business-as-usual in Washington, but the Justice Department added a bizarre twist to the game by launching a legal attack on some partners from an accounting firm, even though the tax shelters they were peddling were not illegal. The Justice Department’s actions were reprehensible, rather akin to the totalitarian tactics of the tax authorities in Russia. If tax lawyers at the Department of Justice think that some people are taking advantage of tax loopholes, they certainly have every right to inform lawmakers and to ask them to change the law. In an ideal world, they would even recommend lower tax rates to remove the incentive to seek out new shelters. But they should never have the right or the ability to arbitrarily declare – by bureaucratic fiat – that tax planning is a criminal act. The Wall Street Journal condemns the Justice Department for its unethical behavior:

The Justice Department’s case against 16 former KPMG partners for tax evasion continues to unravel, with prosecutors themselves conceding late last week that federal Judge Lewis Kaplan has little choice but to dismiss the charges against most of the defendants. Judge Kaplan ruled last year that Justice had violated the defendants’ Constitutional rights by pressuring KPMG not to pay their legal fees. He is now considering a defense motion to dismiss. Prosecutors continue to protest the judge’s ruling but on Friday they admitted in a court filing that dismissal is the only remedy for the rights violations. The more honorable route would have been for prosecutors to acknowledge their mistakes and dismiss the charges themselves. The truth is that this tax shelter case should never have been brought. Both KPMG and its partners believed the shelters they marketed were legal, and no tax court had ruled against the shelters before Justice brought its criminal charges. Then prosecutors used the threat of criminal indictment against all of KPMG to extort an admission of guilt from the firm and force it to stop paying the legal bills of individual partners.