IRS Commissioner Shulman shocked most tax preparers and professionals last week at a New York State Bar Association Tax Section Meeting when he proposed that businesses should be required to provide detailed information in their tax returns regarding uncertain tax positions taken on their returns. Under the Commissioner’s proposal, taxpayers would be required to provide a “few sentences” of information explaining the nature of each uncertain tax position, and taxpayers who fail to disclose these “uncertain tax positions” would be subject to significant penalties.

If it sounds like the Commissioner is asking taxpayers to do the IRS’s job for them, you are at least partially right. The Commissioner is concerned that the IRS is spending too much time attempting to identify tax issues and believes that requiring the disclosure of uncertain positions will enable the IRS to resolve these issues much more quickly and efficiently than it is doing right now.

A few years back, accounting standards were modified to require companies with financial statements prepared in accordance with generally accepted accounting principles, and many financial statements prepared in accordance with an other comprehensive basis of accounting, to include information in their financial statements and/or footnotes about uncertain tax positions. Note that an uncertain tax position does not necessarily mean aggressive tax positions, but rather tax positions where the outcome of an issue if litigated in court was not certain.

As a result of concern expressed by small business owners as well as the accounting profession, the requirement to include such information in financial statements was initially limited to publicly owned companies. Its application to privately held companies has, for the most part, been delayed until 2009 financial statements.

In reviewing the information now being provided by public companies regarding uncertain tax positions in their published financial statements, the IRS was able to gather a great deal of information. Public companies, because they generally have greater resources and frequently more tax at stake, are generally in a better position to defend these uncertain tax positions than privately held companies. The IRS now wants to get this information from virtually all companies with financial statements using generally accepted accounting standards (frequently referred to as “GAAP”), but they would like it provided to them via the company’s tax return.

CB&H does not believe that the Commissioner’s proposal represents good tax policy. While we believe that all taxpayers should pay their fair share of the overall tax burden, requiring taxpayers to provide such detailed information regarding uncertain tax positions, which may be perfectly proper and appropriate under the circumstances, represents an unfair and unwarranted intrusion into the voluntary tax compliance system.

The Commissioner’s proposal, which could be implemented as early as the 2010 tax year, could cause taxpayers to avoid discussing controversial tax matters with their accountants and tax return preparers. If the proposal causes taxpayers to hide such matters, overall tax compliance and administration will suffer. Rather than improve tax compliance, the result could be just the opposite.

CB&H plans to express its concerns on this proposal both directly to the IRS and Treasury Department as well as participate with the American Institute of Certified Public Accountants (AICPA) in its response. If you would like more information regarding the Commissioner’s proposal, please contact your CB&H advisor.

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