IRS Seeks a Road Map to Aggressive Deductions

IRS Commissioner Doug Shulman says tax auditors waste more than 25 percent of their time combing through thousands of pages of corporate returns to spot errors and challenge deductions. Now he's sparked an uproar by asking companies to do a lot of that work for him.

Shulman wants those with $10 million or more in assets to provide the IRS with a road map of what to look for in their returns. A rule proposed on Apr. 19 would require companies to list all tax-saving transactions that might be challenged—along with the maximum they would owe if the IRS won on every issue. Comments from the public are due by June 1, after which the IRS could adopt the rule as final. The new form, Shulman told corporate tax executives in Washington last month, would be "a game-changer with respect to our relationships with and responsibility to our large corporate taxpayers."

Companies agree on the game-changer part. They fear the proposed rule will expose them to more audits, or worse, that the IRS will simply send them a bill for the maximum amount of potential tax they owe. "This is just a fundamental shift," says Diana Wollman, a tax lawyer with Sullivan & Cromwell who is counseling companies on the proposal. "Now, I not only have to tell them what I think I owe, I have to tell them all the things I think they may disagree with. There's a lot of concern that auditors will feel pressure to challenge everything on the schedule."

Dominick Golio, CFO for MedQuist, a Mount Laurel (N.J.) health-information provider, sees another motive: "The ultimate agenda is to seek out new sources of revenue" to combat the federal deficit. Shulman says the IRS is merely trying to save time and money, and promises the form won't trigger unnecessary audits.

The IRS is looking to piggyback on an accounting rule that requires companies to disclose to shareholders details of "uncertain tax positions," or money-saving deductions, credits, and transactions that might raise a red flag. The agency wants even more information, including a rationale for each position. The form would require information on everything from exotic, cross-border transactions designed to minimize taxes to judgment calls over which expenses can be deducted entirely in a single year instead of amortized over time.

It is "emblematic of the need for comprehensive tax reform," wrote Jake Gallagher, vice-president of Globe, a Paradise Valley (Ariz.)-based investment company, in a letter to the IRS opposing the plan.

The bottom line: A proposed IRS rule could shift the balance of power between corporations and the tax collector.

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