There is also the worry to which Kelly alluded: at some point, greater transparency means showing the IRS how you think about your tax planning. Examinations of tax-accrual work papers are especially worrisome. “Client work papers contain sensitive information that could reflect aggressive reporting positions,” says Weinstein. “It’s like handing the IRS a road map so that they can go after these items and disallow them.” In some cases, taxpayers have attempted to assert accountant-client privilege, but so far the courts have upheld the IRS’s right to review the documents.
For its part, the IRS recognizes that work papers are a sensitive area. “There is a competing balance,” says Zelnik. “We want to encourage companies to make an accurate assessment of their tax position without fear that the service will come in and pick the tax-accrual papers up. It’s something we use judiciously.”
Congress Piles On
Finally, there is the fact that Congress and state legislatures are getting into the act just as tax-shelter activity is waning. Congress’s tax bill, which President Bush is expected to sign, shuts down a number of shelters and adds much higher penalties. (At the last minute, law makers stripped out other controversial items, including CEO signoff on the tax-planning process and a whistle-blower provision.) California passed its own tax-shelter legislation last year. “We’ve already seen a shift in corporate culture thanks to changes like Sarbanes-Oxley, increased [Securities and Exchange Commission] oversight, and IRS enforcement,” comments Timothy McCormally, executive director of Tax Executives Institute Inc. “Some of these new proposals are just an unnecessary piling on.”
All of the focus on tax shelters puts finance executives in a familiar bind — fulfilling their duty to ensure their company pays no more in taxes than it has to, while keeping on the right side of the law. “Face it — the pressure is always there to keep a low effective tax rate for the company,” says Kelly. At the same time, pressure from the IRS is unlikely to abate: with the federal budget deficit reaching record levels and new tax cuts possible, the government seems likely to step up its tax-collecting efforts.
For now, at least, the impulse at most companies seems to be to steer clear of trouble. “Tax strategy has become a bad word,” says David Davidson, a partner with Accenture’s finance and performance management business. “Companies don’t want to hear about creative tax-planning ideas.” That’s certainly true at companies such as Allergan, an Irvine, California-based pharmaceuticals firm. “We are very conservative on transactions, and don’t do anything significant without running it past our auditors prior to signing,” says CFO Eric Brandt.
This doesn’t mean that abusive shelters are gone for good, of course. Tax evasion is easiest when tax laws are complicated and ambiguous, and the tax bill recently passed by Congress will add to the clutter. “As long as Congress writes detailed, complex tax laws, someone in the private sector is going to find a loophole,” comments Weinstein. “And they’ll figure out a transaction they can run through that loophole and market as a shelter.”