Enforcement agents are focusing on more-recent tax returns as well. For large companies undergoing continual audit, the IRS says 71 percent of its 2005 audits involved returns filed within the last two tax years — 2003 and 2004. That’s up from 63 percent of its 2004 audits. Taxpayers need “to know sooner rather than later if their tax position is consistent with our interpretation of the law,” says Deborah Nolan, commissioner of the IRS Large and Medium-Size Business (LMSB) Division.
Corporate tax executives are beginning to see evidence of the agency’s new emphasis on speed and efficiency in audits. “There’s a real increased pressure to produce documents faster…[and] a much greater sense of urgency from our team leader,” says Mike Tilton, vice president of tax at Best Buy Co., the consumer-electronics retailer based in Richfield, Minnesota. Nicholas Anthony, vice president and general tax counsel for American Standard Cos., concurs. “Our auditors are asking us to provide more-detailed backup to support positions we’ve taken,” he says. American Standard, a $10 billion manufacturer of household and automotive products, also has IRS auditors continually posted at its headquarters in Piscataway, New Jersey.
In a recent survey by CFO, 43 percent of the 117 respondents said they think the IRS is more aggressive in enforcement than it was three years ago. Although not a majority, this reflects a growing consensus among executives of small and midsize businesses, those with revenues of up to $500 million. Twenty-nine percent said that the IRS’s enforcement efforts are costing them more in federal taxes. Only 25 percent of respondents have adopted more-conservative tax strategies during that time as a result, though, and, of those, most said the biggest factor was stricter corporate governance in the wake of scandals such as Enron and Computer Associates. In any case, CFOs are watching the agency’s efforts with a new wariness. “It hasn’t changed much of what we’re doing,” says Bruce Sedlock, tax director for Allegheny Energy Inc., an electric utility in Greensburg, Pennsylvania. “We’re just doing it in a more structured manner.”
Flushing Out the Cheats
In addition to its enforcement efforts, the IRS also has instituted several new rules and disclosure requirements aimed at flushing out companies that may still be using questionable tax strategies. Among them is Schedule M-3, which requires large corporations to disclose transactions that produce a significant book-tax difference. (A significant book-tax difference exists if the treatment of any item for federal income tax purposes differs by more than $10 million on a gross basis from the treatment of the item for book purposes in any tax year.) Schedule M-3 forces corporate taxpayers to provide vastly more-detailed information to the IRS than was previously required. M-3 was first required for corporations filing Form 1120 starting with the tax year ending on or after December 31, 2004.
In its efforts to round up tax cheats, the IRS is also getting some help from the Financial Accounting Standards Board. The board recently issued Proposal 109, which stipulates that in order to show the net financial benefits of a tax position, the treatment must have a “probable recognition threshold,” which is commonly interpreted as at least a 70 percent likelihood of being upheld. Previously, the wording was “more likely than not.” If 109 is approved, says Thomas Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants, FASB and Schedule M-3 will have given the IRS a new window into aggressive tax strategies.