Mr Stein has not responded to the charges, which were revealed in a court in New York, but it is understood that he intends to deny allegations that he conspired with seven other former KPMG executives and a lawyer to defraud the US Internal Revenue Service of $1.4 billion.

The eight other defendants are also expected vigorously to defend the charges, sources said last night.

The indictment of Mr Stein and his co-accused was part of a wider deal between KPMG and federal prosecutors known as a deferred prosecution. Under the deal, the accountancy firm agreed to pay a fine of $456 million and to be monitored by a court- appointed oversight team for the next 16 months.

The fine took into account more than $128 million of fees that KPMG earned by selling the tax shelter schemes to some of its wealthiest clients. KPMG was given warning that a criminal indictment would hang over it until December 31, 2006. If it breaks the terms of its supervision deal by engaging in any unlawful practices, the firm would be charged and effectively put out of business.

The case focuses on a type of tax shelter marketed by KPMG in the late 1990s that allowed clients to report tax losses to offset big profits elsewhere. KPMG stopped providing the shelters in 2002 and in June this year it admitted that a group of former partners had engaged in “unlawful conduct”.

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