KPMG, the Big Four accountancy firm, is facing a criminal investigation in America over claims that it helped companies and individuals to avoid more than $1 billion (£538 million) in federal taxes.

The probe by the Department of Justice follows a long-running investigation by the Internal Revenue Service (IRS) into potentially illegal tax shelters.

KPMG said that it would co-operate fully with the investigation, which it believes relates to tax strategies that are no longer offered by the firm.

The IRS has spent a year trying to force more than 90 accountancy firms, law firms, insurance companies, banks and brokerages to disclose the names of customers and their tax arrangements. It has filed lawsuits against several accountancy firms, including KPMG, for refusing to hand over the details.

PricewaterhouseCoopers paid an undisclosed sum to settle tax shelter abuses dating back to the mid-1990s. Ernst & Young recently agreed to a $15 million fine and said that it would provide the IRS with full information about clients.

KPMG has tried to draw a line under the affair by removing key personnel and changing its risk management and review processes. Jeff Stein, deputy chairman of KPMG’s US practice and a former vice-chairman of KPMG’s tax services, retired at the end of last month. Richard Smith, vice- chairman of tax services, is to get new responsibilities.

Jeff Eischeid, the tax partner leading KPMG’s personal financial planning section, has been placed on “administrative leave”. He came in for a grilling in November when he appeared before a Senate sub-committee investigating tax schemes.

Mr Eischeid was asked repeatedly whether he had written a memorandum that showed the tax shelters had no purpose but tax avoidance. One senator suggested that he “try an honest answer”. Mr Eischeid later defended his conduct.

During the sub-committee hearings, KPMG said that “it made it very clear to clients that they were undertaking complex transactions on which the law was ambiguous and often had not been clarified by either the IRS or the courts”.

KPMG drew up the scheme which helped WorldCom, the scandal-hit telecoms group, to avoid hundreds of millions of dollars in taxes. A report by Richard Thornburgh, the court-appointed examiner to WorldCom, found that the company avoided state taxes by charging subsidiaries more than $20 billion in royalties over four years. The royalties were payments for intangible assets, including one that KPMG defined as the “foresight of top management”.

The firm said that the strategy was commonly used by companies with subsidiaries in many jurisdictions to simply their state tax structure.

WorldCom’s auditor was Andersen, but KPMG provided corporate tax advice.