Changes in regulations that reign in tax shelters has led to a substantial increase in the number of tax return disclosures — and a substantial increase in corporate concern about heightened IRS scrutiny. This, according to a new survey of 187 senior tax executives conducted by Deloitte & Touche.
As part of ongoing efforts to address tax avoidance, the Treasury Department and the Internal Revenue Service imposed amended disclosure and list-maintenance regulations — under IRS section 6011 — that impose more stringent disclosure requirements on tax returns.
Generally, those new requirements govern a specific set of transactions that lend themselves to abusive tax treatment. Those include listed transactions, confidential transactions, and those with a significant book-tax difference, among others.
Although these regulations have been amended several times, the most recent changes went into effect in January, 2003.
“The additional enforcement actions by the IRS and the Treasury Department have had a real and dramatic impact, with firms making more disclosures and becoming more risk averse,” said Clint Stretch, director of tax policy at Deloitte & Touche. “The survey findings raise the question whether the new proposals would unnecessarily place additional burdens on all firms in an attempt to address behavior, by a relatively few firms, that already appears to be waning.”
Among Deloite’s findings: while only 10 percent of executives said that their companies made section 6011 disclosures in tax year 2000, fully 44 percent expected to make such disclosures in the upcoming tax year. Almost three-quarters believed that the IRS would be either very or extremely likely to examine an item if a section 6011 disclosure were made.
About forty-four percent of tax executives in the survey believed that the Senate’s proposed codification and expansion of the economic substance requirement was at least somewhat likely to delay or impede legitimate business projects at their companies (the economic substance requirement is intended to curb tax benefits arising from transactions with no real business purpose). About four-fifths of the respondents believed that the IRS would be very or extremely likely to use the economic substance requirement as leverage to challenge taxpayer positions.
Respondents were not real sanguine about the CEO signature proposal now being bandied about by the Senate. That proposal would require a company’s CEO — not CFO or chief tax officer — to sign the business’s federal tax return. But 96 percent of tax directors said that their CEO was not very knowledgeable about the issues reflected in the corporate return. Most executives were concerned that if passed, the CEO signature requirement, the economic substance requirement, and the various proposals to strengthen the current disclosure regime would create significant additional burden on their companies.
Three-quarters of tax executives indicated they will have to increase their budgets to comply with these proposals. More than a third said a budget increase of 10 percent or more would be needed to comply.