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January 29, 2010
International Tax Review
Doug Shulman, commissioner of the US Internal Revenue Service (IRS), announced changes to reporting requirements for companies’ uncertain tax positions at a speech before the New York State Bar Association Taxation section on January 26.
A business taxpayer with financial statements prepared under FIN 48 reflecting uncertain tax positions and assets of more than $10 million is required to report those positions at the time a return is filed, the announcement said.
These taxpayers would need to disclose these uncertain tax positions annually, and, for each disclosed position, provide their assessment of the maximum potential federal tax liability.
The IRS will require taxpayers to include a concise description of these uncertain positions with their returns, but they will not need to provide lengthy disclosure of facts or any legal analysis, including their likelihood of prevailing on those positions.
“We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths and weaknesses of their positions,” said Shulman.
“Despite the increase in specific disclosure requirements and penalties for non-compliance, the IRS still feels that it is at a disadvantage in examining large corporate taxpayers,” said Kevin Kenworthy, attorney at the Washington, DC office of Miller & Chevalier. “This announcement may cause companies to examine the way that they are complying with FIN 48 requirements.”
This is the latest step in a conflict between the IRS and taxpayers about attorney-client privilege and the work product doctrine that has been brewing for years.
“The IRS has made a somewhat aggressive, game changing policy move,” said Rich Walton, of counsel at the law firm Buchalter Nemer. “Rather than leaving FIN 48 work papers in the work product world, they are proposing, by regulatory fiat, to create another tax return that would disclose some of this information.”
“The government would obviously like to get their hands on FIN 48 working papers, because it lets them know where the bodies are buried,” Walton added.
The IRS has been upfront about using this new regime to avoid some of the potential minefields that would accompany further litigation on the subject of privilege. However, this new proposal in itself may spawn new litigation.
Although the IRS is authorised to create and require to be filed new kinds of tax returns as part of its mandate to enforce the country’s tax laws, it is an open question whether the Service has the statutory authority to request information on federally mandated returns that would otherwise be protected by the attorney work product privilege.
Tax professionals are expecting a significant level of controversy among practitioners and taxpayers. “I don’t think that they have resolved their [litigation] problems if this proposal ultimately is trying to get at information that taxpayers will argue is protected,” says Walton.
Walton sees this proposal as another move in the direction of putting more pressure on tax practitioners. “As important as it is to see the tax laws enforced, we want to be sure we don’t throw the baby out with the bath water.”
Shulman emphasised that the IRS does not feel the requirements will impose an undue burden on corporate taxpayers. All the information required by the IRS would have already been compiled by the taxpayer for financial reporting purposes, such as FIN 48.
“The goals of our proposal are simple: to cut down the time it takes to find issues and complete an audit, ensure that both the IRS and taxpayer spend time discussing the law as it applies to their facts, rather than looking for information, and to help us prioritise selection of issues and taxpayers for examination,” said Shulman.
The IRS is soliciting comments from practitioners and business taxpayers on the proposal and expects feedback about how to improve tax administration and compliance. The comment period is open until March 29 2010. |
