IRS requires corporations to report aggressive use of tax breaks that might not pass muster

IRS requires firms to report iffy tax breaks

WASHINGTON — The Internal Revenue Service plans to start requiring large corporations to disclose on their tax returns whether they are taking tax breaks that might be unacceptable to the IRS.

Large corporate tax filings are often complex, with some firms taking tax breaks that fall into a gray area of tax law. IRS Commissioner Douglas Shulman said Tuesday that requiring firms to flag those “uncertain tax positions” for IRS examiners would improve enforcement.

Firms must already disclose in financial reports that they have taken such tax positions, but the reports are not usually detailed enough to help IRS examiners. The new rules — they are delayed until at least the 2010 tax year — would require corporations to report the total amount of taxes they would owe if the tax breaks are not allowed, essentially waving a red flag at auditors when taxpayers take big money deductions.

The new requirements would be limited to firms with assets of at least $10 million.

“We’re only asking for a list of issues that the taxpayer has already prepared for financial reporting purposes, in order to improve the efficiency and effectiveness of tax examinations,” Shulman told reporters. “We could have asked for more information — a lot more — and we chose not to.”

Shulman said the IRS will accept public comments on the proposal for 60 days, with regulations to follow. Shulman said he was uncertain when the regulations would take effect, but they would not be in place for 2009 tax filings. He said the IRS has the authority to impose the regulations without new legislation.

Robert Willens, a corporate tax accountant in New York, said the new rules would “fundamentally change the balance of power” when the IRS examines corporate returns.

Examiners would no longer have to spend hours scanning returns in an attempt to find questionable deductions. Instead, they would be listed on returns, with a brief explanation.

“This is going to cause some real consternation out there,” Willens said. “I can understand why the commissioner would want to do this, but we haven’t even begun to hear the last of this.”

Bruce Wein, head of the law firm DLA Piper’s U.S. tax practice, said the new rules are among the most significant tax compliance measures he’s seen in his 40-year career.

“What the IRS is looking for is more transparency,” Wein said.