The Internal Revenue Service is looking to improve its communication with corporate taxpayers. Companies that don’t want to be hit with an audit may want to listen up.
During a recent Webcast sponsored by KPMG, Steven Miller, commissioner of the IRS Division for Large and Midsize Business, said the agency wants to begin a conversation with corporate taxpayers around corporate governance, transparency, and tax compliance. “I remain concerned about the current inefficient, and perhaps ineffective, relationship between the IRS and large corporate taxpayers—a relationship that is not dissimilar in my mind in many cases to a high stakes game of hide-and-seek,” he said.
Miller said the IRS has two choices: keep spending time poring over the returns of large corporations, hunting for material issues that are “at best buried among a plethora of paper” and at worst deliberately hidden; or work to gain a better understanding of its client base, and “hopefully leverage some corporate government practices that might limit some risk behavior and increase our ability to identify material tax issues.”
The latter path, he added, will help the IRS “do a better job in assuring we collect the proper amount of tax from our business taxpayers in the most efficient manner.”
In general, Miller said, the IRS is trying to allocate more resources for its examinations process. For example, the agency is increasing its focus in some areas through the use of its “tiered issues process,” where the IRS designates certain issues for examination on a mandatory basis by setting up “issue management teams.” The IRS also is focusing more on conducting single-issue exams across an industry, which allow for greater coverage on an issue.
“We want to engage the leaders of our corporate taxpayers in discussions about their roles and responsibilities in conducting appropriate assessment and management of tax risk.”
—Steven Miller,
Commissioner,
IRS Division for Large and Midsize Business
The IRS also wants to increase its expertise in critical areas through training and outside hires in specialty areas. “We’re hoping to do more of that in the coming year,” he said.
Miller also said the IRS wants to find new sources of information about corporate behavior beyond the standard tax return. He gave the example of the Securities and Exchange Commission’s “fleet of information,” including comment letters and sanctions, security violations, litigation, and fines. “This is going to allow us to identify those businesses that demonstrate a big risk appetite for risk taking in other areas, and that may well indicate that they have a big appetite for tax risk as well,” he said.
The IRS understands that risk appetites for tax do vary across different companies and industries, and that companies face great internal and external pressure to pay the bare minimum in taxes so the dollars can be reinvested, Miller said. Still, there is a need for the IRS and corporate taxpayers to communicate more efficiently.
“I’m not suggesting a sea-change here,” he said. “We don’t intend to infringe on business decisions of the corporate leaders, but we do want to engage the leaders of our corporate taxpayers in discussions about their roles and responsibilities in conducting appropriate assessment and management of tax risk.”
To start, he said, management must understand the tax risks of the corporation, because corporate governance plays such an important role in assessing tax risks. “We believe corporate taxpayers that employ sound management and governance practices regarding tax policies and practices are more likely to comply with the tax laws,” Miller said.
Miller recommended that corporate tax departments ask themselves the following questions:
Who is making decisions within the organization about tax risk matters?
Is there a single person (or group of persons) within an organization ultimately responsible for the organization’s tax risk assessment and management? If not, should there be?
If there is, is that person or group housed in a tax department, and is that where that assessment should be made? Or should it be discussed within the context of the overall risk strategy of the organization?
Next, he said, become familiar with the company’s internal controls regarding tax risk assessment and management. What are the best practices over tax management decisions, and are they being employed? Are current financial protections that are imposed by the Sarbanes-Oxley Act and the Financial Accounting Standards Board, for instance, sufficient enough?
Miller noted that the IRS views these practices as more than just a discussion of internal financial controls. “It’s about whether the aggregate tax risk undertaking by the organization is acceptable from a financial statement, business, and reputational perspective,” he said.
SOME RECOMMENDATIONS
Steven Miller, Commissioner of the IRS Division for Large and Midsize Business, recommended that corporate tax departments ask themselves the following questions:
Who is making decisions within the organization about tax risk matters?
Is there a single person (or group of persons) within an organization ultimately responsible for the organization’s tax risk assessment and management? If not, should there be?
If there is, is that person or group housed in a tax department, and is that where that assessment should be made? Or should it be discussed within the context of the overall risk strategy of the organization?
Source
IRS Webcast Sponsored by KPMG (Sept. 21, 2009).
Transparency
Transparency also continues to be important to the IRS. Miller said that the agency is working on new areas of disclosure to better prioritize filed returns and issues that the agency examines. One such example includes additional disclosure earlier in the process, including at the time a return is filed.
That said, Miller also stressed that the IRS has no concrete plans for new transparency rules any time soon, and companies shouldn’t expect anything “quick and provocative.” If any changes are on the horizon, companies will be notified well in advance, he said.
Miller also added that transparency is the lynchpin to the Compliance Assurance Process. Under the CAP program, corporate taxpayers are encouraged to identify and resolve issues prior to filing a tax return, in exchange for real-time tax certainty. Currently, more than 100 of the agency’s largest business taxpayers take part in the program.
While CAP is still a pilot program, Miller said he has “no doubt” that it will eventually be made permanent. However, he said, the IRS needs to think “long and hard” before expanding it.
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