No Taxation Without Ramifications

What's on the watch list for 2011? Plenty.

So far, New York’s lower courts and its appellate division have found the law to be constitutional, but the appellate court is still seeking information on the Internet sales issue. As of December, Amazon.com and Overstock.com continued to appeal decisions that sided with the state. Meanwhile, the National Governors Association has launched the Streamlined Sales Tax Project, a multistate effort to simplify and align sales-tax policies as a way to ease the burden of tracking and collecting taxes in states where retailers don’t have a physical presence. More to the point, the pressure to apply sales tax to goods and services sold via the Internet is certain to increase.

Shoring Up Your Position

The word transparency has been thrown around a lot since the Sarbanes-Oxley Act was passed in 2002. Now the IRS is using it as a rallying cry to demand more information about what is known as uncertain tax positions (UTPs).

UTPs are tax deductions for which companies set up a cash reserve because management suspects the position taken by the company may not stand up to an IRS audit. Currently, accounting rules require that companies report these “weak” or uncertain positions in the aggregate, as a total pot of cash that sits on the balance sheet. But Schedule UTP, which is filed along with annual corporate-tax returns, requires an itemized list of the positions, a brief explanation of each, and a dollar estimate of the potential losses, which, for practical purposes, becomes a bread-crumb trail for IRS auditors to follow.

At nearly $13 billion, the IRS budget for fiscal-year 2011 is 4% higher than its 2010 budget, and officials claim that the agency is “vigorously” pursuing its enforcement agenda. When it released its budget documents last year, the IRS also noted that it would “build and deploy” advanced information-technology systems, processes, and tools to improve its efficiency and productivity. Part of the efficiency effort is Schedule UTP, says Jeffrey LeSage, national managing partner for KPMG’s U.S. tax practice. The itemized list allows IRS auditors to do less with more, since companies are being forced to raise their own red flags every time they suspect the IRS might balk at a deduction.

Abandoned, but Not Forgotten

After more than a decade, Delaware and Staples Inc. are still at odds over how much the office-supply giant owes the state in unclaimed property. Abandoned or unclaimed property is commonly payroll, refund, and dividend checks that under escheat laws are turned over to the state after a waiting period, if the company holding the property cannot locate the owner. Typically, owners claim only a fraction of what states hold in their treasuries, says Noel Hall, a principal and unclaimed-property expert with Ryan, a tax-services firm. What’s more, states often borrow the unclaimed cash and use it to fund infrastructure and education projects.

In 2000, Staples voluntarily disclosed to Delaware that it owed about $137,000 for abandoned property it failed to report. However, Delaware launched an audit and alleged that the company owed nearly $4 million. Staples sued the state in 2010, but the case remains unsettled. It’s the third unclaimed-property suit for Delaware in the past few years, with CA Inc. (formerly Computer Associates) and McKesson Corp. filing complaints there in 2008 and 2009, respectively. So far, Delaware has come out a big winner. CA eventually settled the case for $17.6 million, a far cry from its initial voluntarily disclosed amount of $2.3 million.

With states eager to fill coffers any way they can, unclaimed-property seizures will increase. The problem for corporations, says Hall, is that “most CFOs are sitting on a powder keg,” especially if they have already written off the property but then either voluntarily move into compliance mode or are forced there by an audit, without quantifying the potential income-statement hit. States have been known to chase hundreds of millions of dollars in unclaimed property from a single company. And although settlements generally are for far less, the sting can cost some finance chiefs a bonus — and, in extreme cases, Hall says, their jobs.

Marie Leone is deputy editor for online initiatives at CFO.

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