In a move likely to meet with resistance from corporations, the Internal Revenue Service has proposed new rules that would require companies to provide the agency with a list of their “uncertain tax positions.”
The IRS's proposal “will certainly change the dynamic in many audits,” says Matt Miller, senior director for tax and economic policy at Financial Executives International (FEI.) “Just the mere fact of identifying issues as uncertain is significant and really kind of provides a road map to the IRS, which obviously is of concern to companies.”
FEI supports transparency, Miller says, but the IRS proposal “appears to go beyond transparency. It involves the disclosure of exposure items to possible adversaries.”
The proposed rules would apply to companies with assets of $10 million or more that prepare their financial statements in compliance with FIN 48. On a new schedule to be included in business tax returns, companies would have to provide a description of each uncertain position, including the sections of the Internal Revenue Code and the tax years involved, and the amount of federal income tax the company would owe if the position were disallowed. The IRS says companies would not have to provide their risk assessments for the uncertain tax positions or the amount of tax reserves related to the positions.
Currently, under FIN 48, companies include in their financial statements a single number reflecting the total reserves they have taken related to all uncertain tax positions, not just those involving federal income tax. The numbers the IRS requirements would elicit would probably be much larger, since they would show the total amount of federal income tax involved, and much more informative for the agency.
The IRS proposal comes as Textron appeals to the U.S. Supreme Court a federal appeals court decision that would give the IRS greater access to companies' tax work papers than the agency has had in the past. In its announcement, the IRS says that except for the new information it is asking companies to disclose on uncertain tax positions, it “intends to retain the existing policy of restraint for requesting tax accrual workpapers.”
“This initiative could be viewed as an approach by the IRS to obtain certain information contained in the tax accrual work papers without the IRS having to request those work papers,” Miller says.
In a speech Tuesday, IRS Commissioner Doug Shulman said the agency spends up to 25% of its time in audits of big companies looking for issues. The new regulations would make audits more efficient by reducing the time the IRS spends identifying issues and helping it “prioritize selection of issues and taxpayers for examination,” Shulman said.
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Susan Kelly
Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.
