IRS Chief Warns Boards On Risky Tax Positions

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

23 October 2009

US Internal Revenue Service (IRS) Commissioner Doug Shulman has urged company directors to take the issue of tax compliance more seriously and to ensure that their businesses have additional mechanisms in place to assess the risk of uncertain tax positions more effectively.

In a speech to the National Association of Corporate Directors Governance Conference, Shulman acknowledged that board members may not always be acquainted with the finer points of the US tax code, but he argued that, nevertheless, boards of directors have an important role to play in overseeing tax risk and tax strategies of corporations.

"Tax issues should remain on your radar screen – and for good reason. It’s one of the biggest expenses on your income statement," Shulman said.

"In addition, a number of public companies have reported material weaknesses in internal controls related to taxes. Tax strategies can also present a financial and restatement risk, and sometimes when the cases are high profile, a significant risk to corporate reputations. In today’s business climate, the general public has little tolerance for overly aggressive tax planning that can be viewed as corporations playing tax games. So, although the complexity of the tax code may make your eyes glaze over, board members – like you – are critically important to making sure that the tax system works," the IRS chief told the gathering.

Shulman also acknowledged that, in the post-Sarbanes Oxley world, companies have invested significant time and resources on compliance issues and internal controls, including in the tax arena. However, while he noted that many businesses are taking tax positions "in good faith," others may be more aggressive and use elaborately structured transactions or arrangements to "push tax planning up to the edge, or beyond acceptable bounds."

This led the IRS chief to discuss the matter of FIN 48, which establishes the financial statement accounting for uncertain tax positions, including recognizing and measuring their effect on financial statements.

"Under FIN 48, companies must identify their material uncertain tax positions. They must quantify the company’s maximum exposure and estimated likelihood of winning or losing the issue if challenged by the IRS. And they must record as a liability a specified amount of money relating to these uncertain tax positions. In other words, FIN 48 is a very significant window into tax risk, liability and management in your company," he observed.

With national tax authorities rising to the challenge of aggressive corporate tax sheltering, Shulman went on to suggest that companies should have additional mechanisms to oversee risk as part of the governance process, including the formation of independent tax firms to discourage tax departments from "opinion shopping." He also said that corporations should specifically address transfer pricing issues and the relative profit allocated to low tax jurisdictions.

Shulman also encouraged boards to make greater use of IRS programs already in place which seek to eliminate compliance issues before a tax return is filed, such as the compliance assurance program (or CAP) and the Advanced Pricing Agreement program.

"I want to be clear about what I 'do' intend and 'don’t' intend in this dialogue," Shulman said. "We don’t intend to second-guess legitimate and thoughtful business decision-making by corporate leaders. And we don’t expect that you will always agree with us on identifying and quantifying the risk of various tax positions. But we do want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk."

"My goal here today was to start a discussion about the board of directors’ role in overseeing tax risk," he added, before concluding: "I encourage you to have the dialogue, and offer the IRS as a resource as you continue to evolve your thinking about this topic. At the end of the day, my proposition is that the board needs to have the tools, not to do tax planning, but to oversee tax strategies and risks."

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