US Firms Braced For Heavier Tax Reporting Burden

by Mike Godfrey, Tax-News.com, Washington

05 June 2006

Public and private companies of all sizes expect to face a heavier burden in reporting their tax liabilities, both to the IRS and to their shareholders, according to a Grant Thornton LLP survey of senior financial executives.

Significant changes aimed at increasing transparency and disclosure are seen by these executives as being at the heart of that increased burden, found the accounting firm's survey, which was conducted during February and March 2006. These conclusions were drawn from responses received from 122 CFOs and senior comptrollers at public and private companies with revenues ranging from less than $50 million to more than $2 billion.

One such change is the IRS's new Schedule M-3 requirements. Of the senior financial executives surveyed, more than 40 percent expect the additional Schedule M-3 requirements to significantly or moderately affect the time and expense required to complete their federal tax return. The Schedule M-3 reconciles a company's financial and tax accounting systems in significantly greater detail than the old Schedule M-1.

Meanwhile, the Financial Accounting Standards Board (FASB) is expected to soon issue a new interpretation under Statement of Financial Accounting Standards No. 109, relating to the financial statement recognition and measurement of tax benefits arising from uncertain tax positions. The FASB itself has acknowledged that the new interpretation may increase the corporate costs of accounting for income taxes.

According to Grant Thornton, more than three out of five companies (63 percent) are already receiving occasional or frequent requests from their outside auditors for more documentation regarding their income tax reporting, despite the fact that the final FASB interpretation, when issued, won't become effective until January 1, 2007.

Additional financial accounting and tax law changes will also affect how companies account for stock options and deferred compensation. As a result of new accounting and tax rules, more than one-quarter (26 percent) of companies are changing their equity compensation arrangements.

"The new tax rules are creating a greater corporate obligation to methodically determine the amount of tax benefits that can be recognized for financial statement purposes. They also highlight the changed relationship between companies and their auditors," noted Dean Jorgensen, National Managing Partner of Grant Thornton's National Tax Office.

"Under the new rules, the auditors will be focused on verifying the numbers and making sure the companies have the proper internal controls in place to support their initial estimates and subsequent changes in such estimates," he added.

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