Lawyer sentenced in EY tax fraud scheme

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New York (June 10, 2020) – U.S. District Judge Sidney H. Stein sentenced lawyer, David Smith, to three years in prison for tax evasion, on June 8. He worked with partners at Ernst & Young LLP (EY) on five ‘tax shelters’ that were sold or implemented by EY between 1999 and 2001 in order to help wealthy EY clients. Smith spent eleven years on the lam in Vancouver avoiding U.S. charges. Additionally, he has been ordered to pay $7.8 million in restitution for the case that cost the U.S. government billions of U.S. dollars.

A U.S. court sentenced lawyer, David Smith, for his part in the Ernst & Young (EY) ‘tax shelter’ case on June 8. The 63-year-old spent more than a decade in Vancouver avoiding the U.S. charges. Smith worked with partners of the accounting giant to develop and sell illegal tax shelters to wealthy EY clients.

Sentenced after eleven years on the lam

Smith fled to Vancouver before he was initially charged in 2008 in connection to the EY tax fraud scheme. Canada handed him over to federal prosecutors in New York last July after he fought extradition for 11 years.

In February of this year, Smith pleaded guilty to one count of filing a false tax return. After a two-hour sentencing conducted via video, the US. District Judge Sidney H. Stein handed down the sentence on June 8, in which he denied Smith’s request to be sentenced to the 11 months he had already served in New York’s Metropolitan Correctional Center. Stein ordered Smith to serve three years in feder prison, which was the maximum sentence permitted under Smith’s plea agreement.

Stein justified his decision with the argument that the lawyer was among the main facilitators of one of the largest tax fraud schemes in U.S. history. ‘I do find his conduct was very serious, long-running and caused great harm,’ Stein said. ‘He was really a leader, a developer of this tax fraud scheme.’ Furthermore, he ordered Smith to pay $7.8 million in restitution within 120 days.

One of the largest tax-fraud schemes in U.S. history

According to court documents, EY formed a new group in 1998 tasked with designing tax strategies, or ‘tax shelters’ to market to ‘high net worth’ individuals, who are seeking to shelter at least $20 million from income tax liability.

The EY task force was dubbed SISG (Strategic Individual Solutions Group) after they were renamed in 2000 and designed five ‘tax shelter’ that cost the U.S. government billions of U.S. dollars in lost revenue. 2007, four former EY partners and other employees of the Big Four firm were charged for manufacturing billions of dollars in paper losses that were used to offset the taxes of their wealthy clients between 1999 and 2001.

Read more: Vancouver stock promoter sentenced for tax evasion

The jury in the trial of 2012 heard that the term ‘tax shelter’ refers to investments that have the potential for substantial tax savings as one of [their] main benefits. In 2009, the former partners were found guilty for participating in the EY scheme. Although, an appeals court reversed convictions for two of them.

The case was part of a major government crackdown on illegal tax shelters. In 2002, an U.S. Senate Subcommittee initiated an in-depth investigation into the development, marketing, and implementation of abusive tax shelters by professional organizations such as accounting firms, banks, investment advisors, and law firms. One of the results were KPMG LLP paying a $456 million fine for another tax shelter ring.