Fraudulent Tax Shelter Losses: Backdated Trades and False Opinion Letters

A whistleblower can expose fraudulent tax shelter losses by showing how the trades, dates and client instructions differ from the story in the tax opinion. In the criminal cases behind these schemes, professionals sold clients a desired tax loss, arranged the transactions and supplied opinions to support the deduction. When the transactions failed to produce the promised result, some participants changed the dates on the documents. If you worked on the trades, the opinion drafts or the returns, you may know where the paper account stopped matching what happened.

This page follows manufactured trading losses from the sales pitch through the opinion and onto the return. Our broader page on connecting business records to a tax return covers the evidence chain across other kinds of tax fraud.

How a Manufactured Tax Shelter Loss Became a Product

The client’s desired tax loss could determine the transaction before any investment took place. In its account of the criminal trial of a Chicago tax-practice leader, the Justice Department described preplanned steps designed to produce specific tax benefits. The clients wanted to eliminate large tax liabilities, and the professionals created documents that falsely described their reasons for entering the transactions. The department reported over $7 billion in fraudulent tax losses and over $1.6 billion in client taxes evaded through that scheme.

The Justice Department’s account of another participant’s guilty plea and the indictment described how professionals assembled the fraudulent tax shelters. Tax attorneys worked with BDO Seidman personnel and financial-institution brokers to market and implement the arrangements. The work included creating corporations and partnerships, setting up bank accounts and providing the client with a tax opinion.

The criminal trial account concerning a Deutsche Bank broker shows what implementation meant inside the bank. The broker attended sales pitches, opened accounts for the entities and carried out transfers among the accounts. He also helped select stocks to disguise the fraudulent losses from the Internal Revenue Service. For someone who handled those accounts, the transaction instructions can explain a sequence that the final tax return compresses into a loss.

What Do Backdated Tax Shelter Trades Show?

Backdated tax shelter trades can show an effort to manufacture a result after the tax year has closed. In the Chicago tax-practice prosecution, the Justice Department’s account of the trial evidence described transactions that failed to produce the amount or type of loss the clients had requested. The participants then carried out correcting transactions after year-end and backdated the documents to make the desired losses appear to belong to the earlier year.

The broker’s criminal case supplied the bank side of the same practice. According to the department’s account, the tax attorneys worked with him to create documents and carry out securities transactions after the year had closed. They used “as of” dates to treat documents as though they had been signed earlier. The difference reached beyond a date typed into a letter: the securities transactions themselves occurred later.

A bank employee may know when a transfer actually occurred. A tax-practice employee may know when the failed transaction was discovered and who requested a repair. We connect those accounts to the original instructions, subsequent changes and loss ultimately claimed. The question is how a later transaction became an earlier deduction.

In the tax-practice leader’s criminal case, the false dates also entered the opinion letters, and clients filed returns claiming losses to which they were not entitled. We call that rewriting the calendar to deliver the loss sold to the client. The tax year was over. The paperwork kept trading.

What Makes a Tax Shelter Opinion Letter False?

A tax shelter opinion letter can carry a fabricated transaction date into the explanation offered for a claimed loss. In the Chicago prosecution, the Justice Department said the tax-practice leader wrote opinions that falsely described when parts of the transactions occurred. The opinion and the trading records therefore tell competing accounts of the same events.

KPMG’s deferred prosecution agreement supplies an even more direct account of how false facts entered an opinion. The firm admitted that certain tax partners drafted false factual representations and issued opinions that purported to rely on those representations, although the partners and clients knew they were untrue. The people supplying the factual premise also supplied the professional assurance built on it.

The Justice Department’s announcement of KPMG’s admissions identifies what the false descriptions concerned. Opinions presented tax shelters as legitimate investments and claimed clients entered transactions for investment purposes or portfolio diversification. For BLIPS, the admitted falsehoods also concerned the transaction’s duration and the client’s reason for ending it. An employee who saw the sales pitch, the client representations and the opinion draft could see how the explanation changed between documents.

The same announcement said the criminal charges alleged sham loans behind BLIPS, including a purported loan that at least one bank never funded. That allegation points to a concrete financing comparison: the loan described in the tax materials against the money the bank actually advanced.

The broader question of intent in tax fraud includes who knew the facts were false. Here, the comparison starts with a factual assertion that can be tested: the execution date, the funding, the investment purpose or the reason for ending a transaction. We work through those assertions with the person who saw how they were selected, changed or approved.

How Tax Shelter Professionals Maintained the Story

Different participants controlled different parts of the tax shelter’s explanation. The firms’ admissions show how the product could extend from advice and financing through tax-return preparation and the answers given during an Internal Revenue Service audit.

Ernst & Young’s Tax Purpose Disappeared From the File

Ernst & Young admitted that certain partners and employees helped conceal the tax purpose of its products. In its announcement of the firm’s non-prosecution agreement, the Justice Department described a group inside the firm that coordinated marketing, implementation and defense of the tax shelters.

According to the admitted statement of facts described in that announcement, some group personnel directed employees not to create or circulate documents reflecting the tax motivation or the preplanned sequence. In some instances, personnel falsely portrayed the transactions as investment-driven and denied a tax motive in responses and testimony to the Internal Revenue Service. They also prepared documents or correspondence that falsely described events or conversations to influence a later audit.

Ernst & Young prepared returns claiming losses from the products and defended some clients during IRS audits. That gave the same professional operation a role in selling the transaction, reporting its result and explaining it afterward. If you saw the internal instructions and the audit response, you may know which facts disappeared between the two.

Deutsche Bank Supplied the Financial Transactions

Deutsche Bank’s own admission concerned its participation in financial transactions that furthered fraudulent tax shelters. The Justice Department’s announcement of the bank’s non-prosecution agreement said the bank provided a detailed statement of its wrongful conduct.

The bank records can connect the professional plan to its execution. An opinion might describe a financed investment while the account history shows the actual transfers, counterparties and sequence. Someone who processed the transactions or received the correction instructions can explain why the movements occurred in that order and how the tax practice used them.

What Does a Tax Shelter Fee Based on Purported Losses Buy?

A tax shelter fee calculated as a percentage of purported losses prices the deduction being sold. The Justice Department’s account of the tax attorney’s guilty plea and indictment says clients usually paid 5% of purported ordinary losses or 4% of purported capital losses. In exchange, the professionals helped implement the tax shelter’s stages and supplied a legal opinion. The fee followed the claimed loss, rather than the client’s actual tax savings.

That fee basis gives an insider another way to connect the sales file to the transaction file. The engagement terms and invoice can identify the size and kind of loss the client requested, while the execution records show what the transaction produced. Where the participants later repaired a failed transaction, those records help explain the result they were trying to restore.

The Justice Department reported that the tax-practice leader personally received approximately $95 million in fees through the broader scheme. His clients bought purported losses, while the professional selling them received actual fees. The fee record can show both what was promised and what the promoter stood to earn from delivering it.

What Evidence Do I Need for an IRS Whistleblower Claim About Tax Shelter Losses?

For manufactured tax shelter losses, useful evidence connects the promised deduction to the executed transaction, the opinion’s factual assumptions and the return. An insider’s account can identify who supplied those assumptions and who knew a step had failed. We examine the records together around the specific contradiction:

• Execution and financing: Trade instructions, bank transfers and securities records show what happened and when. They give us a comparison with the dates and financing described in the tax materials.
• Client purpose: Sales communications and client instructions show the result the client sought. They can be compared with representations that the client pursued investment profits or diversification.
• Opinion drafts and revisions: The factual assertions in successive versions show what changed. The person who received or approved a revision may be able to explain why it changed.
• Fee terms: The engagement and billing records connect the professional’s compensation to the loss being promised. They also identify the people and businesses selling the arrangement.
• Returns and audit responses: These show which account of the transaction reached the IRS. Internal instructions can explain a statement omitted from the return materials or contradicted in an audit response.

The tax return may be the endpoint of a chain involving a promoter, adviser and preparer. The person signing it may not be the person who selected the trade or drafted the opinion’s assumptions. We work with you to connect the participants and their decisions to the deduction and the government’s missing tax revenue.

Why an Insider Can Explain What the Return Conceals

An insider can explain the commercial purpose and instructions behind a transaction that looks ordinary on a return. A 2014 Villanova Law Review paper, Not Just Whistling Dixie: The Case for Tax Whistleblowers in the States, describes how fraudulent inflated-basis transactions were made to resemble ordinary partnership interests with a high tax basis and little value. The paper shows how a reported position can conceal the arrangement behind it.

The paper describes tax shelter marketing that withheld written material, bank arrangements involving offsetting options, and efforts to hide the schemes on returns. It makes the value of the person inside that operation plain:

You may know that a representation changed between the sales pitch and the opinion, that a client requested a particular tax loss, or that a supposed earlier trade was a later repair. We connect that knowledge to the documents that show how the tax result was manufactured.

Can Fraudulent Tax Shelter Losses Support an IRS Whistleblower Claim?

Information about fraudulent tax shelter losses can support a claim through the IRS whistleblower program. Federal income-tax underpayments belong in the IRS program, not the federal False Claims Act. We assess the transactions, tax years and your firsthand knowledge with you.

Under the IRS whistleblower law, a qualifying claim can pay 15% to 30% of the proceeds the government collects through action based on the information. The whistleblower’s reward follows the recovery connected to that information.

When You Know How the Tax Shelter Loss Was Made

If you worked on the trades, client files or opinion letters and know where the facts changed, speak with our whistleblower experts about the manufactured losses. We build the case with you around the actual transactions and bring in tax fraud whistleblower lawyers who understand professional tax shelter schemes. We stay with you through the case, bringing the expertise to pursue what your view from inside reveals.