Everson Speaks Before Senate Finance Committee On Business Compliance Issues

by Glen Shapiro, LawAndTax-News.com, New York

15 June 2006

IRS Commissioner, Mark Everson on Tuesday appeared before the Senate Finance Committee to discuss compliance issues in relation to large and mid-size businesses.

He started by explaining that the IRS Large and Mid-Size Business Division's taxpayer base, though small in number relative to the overall taxpayer population, consists of the largest businesses in the United States, including corporations, sub-chapter S corporations, and partnerships with assets greater than $10 million, including over 6,100 publicly traded companies.

LMSB taxpayers most recently filed approximately 176,000 income tax returns, and while the overall large business population base remains relatively stable in number, the IRS continues to see an increase in complex business structures and pass-through return filings.

"LMSB taxpayers are sophisticated, well-capitalized, well-organized, and adept at planning. Particularly in the case of public companies, they are driven to show high after-tax profitability to shareholders in a very competitive and complex economic environment. They have the resources and willingness to aggressively defend and contest tax positions," he stated, continuing:

"Those factors and others influence the results that appear when we attempt to capture the portion of the tax gap attributable to these businesses. The National Research Program (NRP) results provided last February estimate the underreporting non-compliance by larger corporations in 2001 to be $25 billion. The estimate for all corporations is $30 billion."

"This represents a voluntary compliance rate in 2001 of 83 percent. Please keep in mind that the NRP did not conduct new research on the corporate portion of the tax gap. As a result, these estimates are rough orders of magnitude."

Turning to the environment for large business taxpayers and corporate tax administration, he warned that the tax authority is facing new and more challenging tax administration problems resulting from globalization, complexity of the Code, complexity of business transactions, and the growing book-tax gap.

The IRS chief presented the Committee with the main challenges facing it, namely that: tax administration is complicated by the rapid pace at which businesses are continuing to expand globally; the Internal Revenue Code continues to expand, becoming more complex and challenging to administer; large businesses are increasingly engaging in sophisticated transactions for both non-tax purposes and tax purposes, resulting in complex relationships with multiple filing requirements; and finally, that companies strive to reflect the highest possible after-tax profits on their financial statements while at the same time being incentivized to report the lowest possible taxable income and tax liability.

He told the senators that:

"We have taken a proactive approach to dealing with the challenges of effective tax administration in the environment described above. Overall, our strategy depends on making compliance checks as much as possible on a real-time or near-real-time basis, being as current in our examinations as possible, and having as much transparency to book-tax differences and other indicators of risk as possible. To that end, we have initiated several programs that foster transparency, currency, pre-filing compliance opportunities, and improved efficiencies in issue and risk identification."

Addressing the challenges facing the IRS, Everson announced that:

"First, to improve transparency on corporate tax returns, we introduced a new Schedule M-3. The Schedule M-3 provides transaction-specific detail on book-tax differences, enabling us to identify and focus more quickly and precisely on those tax returns and issues that present the highest potential compliance risk."

"Second, we introduced the Compliance Assurance Program (CAP), to improve both currency and transparency. CAP is a real-time approach to compliance review that allows us, working in conjunction with the taxpayer, to determine tax return accuracy prior to filing. We believe CAP is more efficient than a post-filing examination — we are currently piloting the model and will refine as necessary — as it provides corporations certainty about their tax liability for a given year within months, rather than years, of filing a tax return. This win-win program greatly reduces taxpayers’ compliance burden and their need for contingent book tax reserves, while increasing currency and allowing for more efficient use of our resources."

"Third, we are conducting the Pre-Filing Agreement (PFA) program to provide taxpayers an opportunity to request that revenue agents examine and resolve potential issues before tax returns are filed. We continue to explore ways to improve and create additional pre-filing compliance opportunities."

"Fourth, working with Treasury and Chief Counsel, LMSB identifies emerging high risk issues as early as possible, issuing guidance to taxpayers and examiners on the proper treatment of these issues, and efficiently and vigorously examines those returns where taxpayers engage in that behavior."

"Fifth, we are mandating, in stages, the electronic filing of large corporate returns (E-Filing) in order to improve issue identification and the selection for examination of high risk returns. Large corporations are required now to file their tax returns electronically and this mandate will expand in future tax years. E-filing will provide more consistent treatment and data analysis for efficient, near real time identification of high risk issues and taxpayers. E-filing and Schedule M-3 together also allow us to more efficiently identify and exclude lower risk taxpayers from consideration for examination."

"The approaches described above better position us to more timely address the rapid change of business in the domestic and global arenas. The earlier we learn of emerging trends, the better positioned we will be to adjust resources to appropriately address compliance risks."

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