Tapping the Auditor to Avoid Taxes

More than 40 percent of the Fortune 500 obtained tax-shelter services from 1998 through 2003; more than 12 percent relied on their external auditor.

More than 12 percent of the Fortune 500 — 61 companies in all — obtained tax-shelter services from their external auditor from 1998 through 2003, according to a General Accounting Office report citing data from the Internal Revenue Service.

This resulted in a loss of potential tax revenue of about $3.4 billion, including $1.8 billion in categories the IRS considered abusive.

Altogether, 207 Fortune 500 companies obtained tax-shelter services from their external auditor, another accounting firm, or another company. According to the GAO, the potential tax-revenue loss to the federal government over many years is an estimated $56 billion, about 44 percent of it related to the tax years 1998 through 2003.

The agency stressed that these numbers are imprecise because of important limitations, such as transactions in the IRS database that sometimes fail to identify the tax-shelter provider. The GAO added that the IRS considers some reportable transactions abusive and others to merely have some possible traits of abuse.

In 17 companies, at least one officer or director used the company’s auditor to obtain individual tax-shelter services for at least one year from 1998 through 2003. Altogether, at 57 of the companies at least one officer or director obtained tax-shelter services from the external auditor, another accounting firm, or another company.

The GAO also stressed that it is not making any recommendations in the report.

The GAO studied eight companies in more depth. All these companies reported using their auditor for some tax services from 2000 through 2003. The services ranged from preparing or reviewing company tax returns to consulting on foreign tax transactions.

The agency noted that representatives of all eight companies said they adopted or refined policies or practices in 2002 or 2003 for pre-approving tax services, for governing the tax services that could be provided, or for governing who could provide them.

None of these companies reported officers or directors obtaining tax-shelter services from their auditors, noted the agency, but six of the eight reported that at some time since 2000 their officers or directors obtained other tax services from the auditors. In four of these cases, the GAO added, company officials said obtaining such services was later disallowed by the company.

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