The AICPA has commented on the IRS notice announcing its intent to require disclosure of uncertain tax positions. See Comments on Announcements 2010-9, 2010-17, and 2010-30 with Regard to Uncertain Tax Positions, AICPA letter to Commissioner Douglas Shulman, June 1, 2010.
The IRS proposal would require business taxpayers with assets in excess of $10 million to file a new schedule disclosing any uncertain tax positions. NOt surprisingly, the AICPA complains that the disclosure regime will cause a number of problems without providing a justifiable benefit. Let's examine the objections raised by the AICPA.
- undercut financial statement integrity
The AICPA admits that the reporting proposal does not "change the underlying rules" but claims that "overlaying" tax disclosure on financial reporting will work at cross purposes to the purpose of financial reporting to be reliable and transparent. Management's judgement, that is, may be influenced by the need for reporting when reserves are established. Surely there will be some firms (and accountants) who try to game the system by changing the financial reporting to avoid tax reporting. But that possibility already exists in so many contexts that it cannot be a strong reason for using financial reporting to trigger tax reporting, and accounting firms must exercise vigilance to ensure that it does not happen. Consider fair value (where a safe harbor relies on financial statements, as lobbied for extensively by broker dealers) and LIFO accounting (where a conformity requirement underlies the possibility of using LIFO for tax) and other similar situations. Financial accounting has always been important to tax, and the revised Schedule M3 for reconciling tax and book numbers was an outcome of the concern that taxpayers might be manipulating book to determine tax. So yes, that possibility exists, and it behooves accountants to ensure that they have applied the rules rigorously, but it is no reason to disregard the information that uncertain tax position accounting may yield for the tax system.
- impose added costs disproportionate to any benefits to the IRS
The added costs are minimal. Since financial reporting already takes place, and accountants already have to consider deferred tax assets and other information relative to uncertain tax positions, there should not be a substantial increase in costs from the new reporting requirement, even though aggregation (for tax purposes) will require some additional calculations.
The AICPA particularly objects to required disclosure where the company claims that there is an administrative practice of accepting the tax position. This objection is particularly weak, since different accounting firms and companies may have different concepts of what it means for there to exist an administrative practice. It is reasonable forthe IRS to want this disclosure.
- introduce complexities that will impede IRS goals,
- disproportionately impact small businesses
The AICPA argues that small privately held entities don't have in-house personnel who can do the required analyses so will have to spend more for external advisers. The suggestion is to increase the asset threshold from $10 million to $50 million and to add a gross receipts test of greater than $100 million. This appears to exempt too many taxpayers. It might be reasonable to increase the asset threshold somewhat, but $10 million is already a substantial company.
- create new tensions between taxpayers, tax advisors and the IRS
AICPA objects that the additional reporting will "inject a new dynamic" into financial reporting for tax uncertainties. Of course, that dynamic has always been there, in that companies have always known that the IRS might seek its tax accrual workpapers and that the information revealed there might point to its aggressive tax strategies. It is a dynamic that will exist as long as there is aggressive tax planning accompanied by an audit lottery possibility. One benefit of the disclosure approach is that it reduces the opportunity for hiding aggressive tax planning and benefiting for the audit lottery.
The AICPA suggests that the difference in GAAP versus IFRS may create unfairness for some taxpayers. But in other circumstances, such as the discussion of a safe harbor for fair value determinations that would rely on any one of a number of different financial statements, the AICPA has heralded the ability of companies to rely on financial reporting even if they don't use the same financial statements as other companies. This argument about "creating artificial differences in the risk profile disclosed to the IRS" and the "sense of unfairness" doesn't hold water.
- require reporting "at a higher level than mandated by Congress."
The AICPA notes that section 6662 of the Code imposes an accuracy-related penalty on taxpayers (a percentage of the underpayment attributable to a substantial understatement of tax liability due to negligence) who do not provide disclosure about tax return positions when they do not have substantial authority for the position, with the more-likely-than-not (MLTN) standard applying only to certain tax shelters. Accordingly, AICPA claims, the IRS is not entitled to require further disclosure. Since the financial accounting standard under Fin 48 is essentially a MLTN standard, it claims, the IRS cannot ask for disclosure on that level.
That argument does not sit well with the Arthur Young case treating accounting work as non-privileged, or with the IRS's view that it has the right to request accrual workpapers as to which it exercises a voluntary policy of restraint.
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