Companies to disclose iffy tax estimates – IRS

January 27, 2010

By Kim Dixon

WASHINGTON, Jan 26 (Reuters) – U.S. tax authorities will soon demand that corporations reveal much more detailed financial information about tax shelters and other complex structures when they file their income taxes, the top U.S. tax official said on Tuesday.

Under new draft guidance, the Internal Revenue Service would require companies to report which tax positions they take that could be “uncertain” or challenged by the IRS.

“These taxpayers would be required to annually disclose uncertain tax positions in the form of a concise description of those positions and the maximum amount of U.S. income tax exposure if the taxpayer’s position is not sustained,” IRS Commissioner Doug Shulman said in remarks prepared for a speech to lawyers in New York in announcing the plan.

The initiative comes amid an increased emphasis under Shulman and President Barack Obama on collecting taxes previously evaded by the wealthy and big corporations.

Companies, which have been bracing for the change, fear it could lead to more complicated tax filings and expose them to greater liability.

“If you want to promote a frank assessment of risk, you may constrain that if people know that whatever they do will be promptly reported to the IRS,” said Rob Culbertson, a Washington corporate tax lawyer at Paul, Hastings, and former associate chief counsel at the IRS.

Shulman, speaking to a New York State Bar Association meeting, said the IRS will not require companies to disclose reserves put aside to deal with such losses.

“We have taken what I believe is a reasonable approach. We could have asked for more — a lot more — but chose not to,” he said.

The proposal, subject to public comment, comes amid stricter financial accounting rules that already require companies to compile such data.

The IRS is also mulling penalties for when taxpayers fail to comply with the disclosure rules and may ask Congress for authority to boost penalties. Companies with total assets of $10 million and above would be subject to the new policy.

The proposal follows a tightening in financial accounting rules requiring companies to report similar information to the Securities and Exchange Commission.

Under those rules, if a company believes it is “more likely than not” that its tax position would be upheld by auditors, it does not need to take reserves for it.

“It’s a very significant development because the announcement doesn’t discuss the level of uncertainty that triggers the reporting requirement,” said Bruce Wein, head of law firm DLA Piper’s US tax practice. It is unclear if the threshold is stricter under the IRS plan, he said.

Obama last week instructed the IRS to review the accuracy of companies’ reports on their tax obligations to be sure they are truthful. He also ordered federal agencies to take measures to prevent companies that are delinquent in paying taxes from obtaining new government contracts. (Editing by Chizu Nomiyama and Dan Grebler)

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