Key takeaways
– The Offshore Portfolio Investment Strategy (OPIS) was an abusive tax‑avoidance product sold by KPMG from about 1997–2001 that created artificial losses using offshore swaps and Cayman shell entities to offset U.S. taxable income.
– OPIS and similar shelters (e.g., CARDS, FLIP) lacked genuine economic substance and were declared unlawful by the IRS in 2001–2002; criminal and civil enforcement followed, including a $456 million KPMG settlement and significant enforcement actions against banks and other firms.
– Companies, advisors, and investors can reduce risk by insisting on economic substance, thorough due diligence, independent legal opinions, robust internal controls and documentation, and full cooperation if past reliance on a shelter is discovered.
Understanding the Offshore Portfolio Investment Strategy (OPIS)
– What it claimed to be: OPIS was marketed as an offshore investment structure that would produce tax losses investors could use to offset U.S. taxable income. It relied on a combination of investment swaps, leverage and offshore (Cayman Islands) entities.
– What it actually was: According to U.S. investigations and later admissions, OPIS generated artificial accounting losses that had little or no real economic basis. The losses were engineered so that investors could claim large tax deductions or losses despite not bearing the economic risk or economic loss corresponding to those tax benefits.
How OPIS was designed and how it worked (high‑level mechanics)
– Offshore shell entities: Special purpose entities established in tax‑favored jurisdictions recorded the transactions.
– Swap/derivative structures and loans: Counterparties (including certain banks) provided loans and derivative arrangements that were purported to create investment exposure and losses.
– Accounting/tax treatment: The structure produced book or tax losses allocated to participants that could be used to lower reported taxable income in the United States.
– Lack of substance: The combination of pre‑arranged back‑to‑back trades, underwriting commitments, or engineered valuation methods meant the losses were largely paper losses rather than the result of genuine market risk or economic loss.
Why the government treated OPIS as abusive
– No legitimate economic purpose: Investigators concluded OPIS and similar shelters existed primarily to reduce taxes rather than to achieve a real business or investment objective.
– Large revenue loss: The U.S. Government Accountability Office estimated abusive shelters deprived the government of roughly $85 billion between 1989 and 2003.
– Evasion and concealment: Email evidence and internal documents showed shelter promoters anticipated and sought to avoid regulatory and IRS scrutiny and sometimes failed to cooperate with investigators.
Enforcement actions and outcomes
– Early government action: The IRS formally rejected many abusive shelter structures in 2001–2002 and began civil and criminal investigations.
– KPMG: In 2005 KPMG admitted criminal conduct related to tax shelters and agreed to pay $456 million; it also agreed to stop selling shelters. Several KPMG partners and others were later indicted in connection with false tax losses and evasion (government claims described billions in false losses and billions in lost tax revenue).
– Other firms and banks: Deutsche Bank’s CARDS product and Wachovia’s FLIP were highlighted by the U.S. Senate Permanent Subcommittee on Investigations (PSI) in a 2003 report. Deutsche Bank later admitted wrongdoing and settled for $553.6 million in 2010. Ernst & Young paid $123 million in 2013 to resolve a federal investigation; PricewaterhouseCoopers reached a settlement with the IRS for an undisclosed amount.
– Client fallout: Many corporate and individual taxpayers who used these shelters were later forced to repay taxes, interest and penalties, and pursued civil litigation against advisors.
Timeline (concise)
– ~1996–2001: OPIS and similar abusive shelters marketed and sold.
– 2001–2002: IRS begins to formally identify and declare many shelters unlawful; increased enforcement.
– 2002–2003: Senate PSI investigates and issues its report (2003), highlighting enablers and tools.
– 2005: KPMG criminal settlement ($456M) and agreement to exit the tax-shelter business.
– 2010–2013: Additional settlements and enforcement against banks and accounting firms (Deutsche Bank, E&Y, PwC, etc.).
Practical steps — for corporate taxpayers and investors
1. Demand economic substance
– Insist that any tax‑reduction strategy have a documented, independent business purpose beyond creating tax benefits. Transactions should change the real economic position of the taxpayer (e.g., risk, timing, or ownership).
2. Require independent legal and tax opinions
– Obtain independent counsel and tax opinions from reputable firms that explicitly analyze both tax law and economic substance. Beware of “opinion shopping.”
3. Conduct thorough due diligence on advisors and intermediaries
– Verify reputations, prior enforcement history, independence, and potential conflicts of interest. Ask for complete documentation of how a structure works and alternative scenarios.
4. Document decision‑making and approvals
– Record business rationale, board or tax committee approvals, internal memos, and economic forecasts. Maintain contemporaneous records showing why the strategy was chosen.
5. Avoid reliance on overly complex offshore arrangements with secrecy
– Structures that rely on opaque offshore entities, pre‑arranged trades, or circular financing are higher risk.
6. Implement internal controls and compliance checks
– Tax compliance teams, audit committees, and external auditors should be informed and able to challenge tax strategies proposed by external advisors.
7. Limit use of leveraged paper losses
– Be cautious when proposed losses are magnitudes larger than actual economic exposure or when the structure involves repeated offsetting trades that neutralize economic exposure.
8. If already involved, remediate proactively
– If you discover or suspect past reliance on abusive shelters, engage experienced tax counsel, consider voluntary disclosure programs, prepare to amend returns and negotiate settlements, and cooperate with investigators where appropriate.
Practical steps — for accounting firms, tax advisors, and banks
1. Strengthen ethical and professional standards
– Maintain clear firmwide policies prohibiting creation or marketing of tax structures lacking substance; require partner‑level approval for complex tax products.
2. Enforce strong documentation and client suitability checks
– Record the client’s purpose, risk tolerance, and whether the client truly bears the economic risk of the transaction.
3. Preserve independence and avoid conflicts of interest
– Do not design tax products while also serving as the client’s auditor in circumstances that would impair independence.
4. Train staff on substance‑over‑form principles
– Ensure all tax professionals understand the tax law tests for substance and economic reality and the risks of aggressive shelters.
5. Cooperate with enforcement where required and retain counsel
– Full cooperation and transparency with regulators and counsel reduce penalties and reputational damage.
Practical steps — if you are a regulator or policymaker (lessons learned)
– Increase transparency around cross‑border financial products and enforce information‑sharing with foreign authorities.
– Strengthen penalties and clawback mechanisms to deter promoters.
– Support whistleblower programs and audits targeted at abusive‑shelter patterns.
– Clarify legal standards for economic substance and issue timely guidance.
What to do if you are sued or contacted by the IRS about an OPIS‑type shelter
1. Engage specialized tax and criminal defense counsel immediately.
2. Gather and preserve all relevant documents in a legal hold (emails, contracts, memos, tax returns).
3. Review prior tax advice and opinions; assess whether they were reasonable and independent.
4. Consider voluntary disclosures or participating in IRS settlement offers where appropriate; negotiate penalty and interest mitigation with counsel.
5. Coordinate civil litigation strategy if you plan to pursue claims against promoters/advisors who misrepresented the structure.
Lessons from the OPIS scandal
– Sophistication is not a substitute for substance: Complexity in design does not protect a structure lacking real economic effects.
– Promoters can be liable: Firms that design, market, sell or facilitate abusive shelters have faced civil and criminal liability.
– Clients bear ultimate tax exposure: Even if an advisor designed the shelter, taxpayers often had to repay taxes, interest and penalties and then seek recovery from the advisors.
– Controls and governance matter: Strong corporate governance and independent tax oversight can prevent risky engagements.
Key sources and further reading
– Investopedia — Offshore Portfolio Investment Strategy (OPIS): https://www.investopedia.com/terms/o/opis.asp
– U.S. Government Accountability Office, Internal Revenue Service: Challenges Remain in Combating Abusive Tax Shelters (GAO), (cited estimates of revenue lost to shelters): https://www.gao.gov
– U.S. Senate Permanent Subcommittee on Investigations, Tax Haven Abuses: The Enablers, the Tools & Secrecy (2003): https://www.hsgac.senate.gov/subcommittees/investigations
– U.S. Department of Justice announcement, KPMG settlement (2005): https://www.justice.gov
– U.S. Department of Justice announcement, Ernst & Young settlement (2013): https://www.justice.gov
– The New York Times and Wall Street Journal coverage of tax shelter settlements and investigations
(For specific DOJ, GAO and PSI reports and contemporaneous news coverage, see the cited organizations’ websites and major news archives.)
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.