IRS Announcement 2010-9 Demands Enhanced Disclosures

Sometimes, even the IRS needs some help interpreting corporate tax filings. In 2002, the IRS detected what it thought might be abusive "sell in, lease out" tax shelter transactions in Textron Inc.'s 2001 tax return. So the agency issued an investigative subpoena to the Rhode Island-based defense contractor, requesting all of the company's "tax accrual workpapers."

Public companies prepare tax accrual workpapers to comply with financial reporting requirements. These documents list any uncertain positions the company took on its tax returns, analyze the strength of those positions, and estimate the additional tax liability that could result if those positions are challenged and overturned. Most companies have a fleet of accountants and lawyers painstakingly preparing such papers so the company can properly report its assets and liabilities. The IRS thought that those documents would be helpful in evaluating Textron's return, which according to the agency's court filings, was 4,000 pages long and accompanied by nine filing cabinets worth of documentation.

Under the Net

In May, the IRS published a draft schedule and instructions explaining what new disclosures it will require under Announcement 2010-9, which will go into effect for 2010 tax returns. The form essentially requires a corporate taxpayer to give the IRS a concise statement of any position the company has taken on its tax return that might be subject to challenge by the agency.

"The IRS is not promising to become more transparent and issue rulings and guidance," Friedman points out. "This is a huge issue because the IRS's guidance is so cryptic that you never know why they did something."

Many tax practitioners are also concerned that from a litigation standpoint, being forced to disclose to the IRS why the company has determined that a certain tax position is uncertain could lead to a waiver of the work-product privilege. This concern is particularly troubling for in-house counsel, whose job is to help the company manage and analyze risk.

Adele Nicholas

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