Inside counsel for today’s businesses are often required to play many different roles: monitor, researcher, business advisor, counselor and gatekeeper, to name just a few. In order to successfully navigate these multiple roles, many in-house attorneys are finding it necessary to open up lines of communication with other key departments within the business. The increased responsibility placed on inside counsel requires extensive intra-business communication to ensure that in-house attorneys are informed of all activities that may have a legal impact on the organization. Unfortunately, in many instances, there is a disconnect between inside counsel and an organization’s tax department. Below is a recent example:
A corporation’s tax department hires a tax consulting firm to seek a refund for taxes overpaid by a subsidiary. The consulting firm handles the claim through administrative appeals and subsequently engages a law firm to represent the corporation in court. However, the general counsel previously dissolved the subsidiary because of an unrelated legal issue with a financial impact 20-times greater than the tax refund. The general counsel first learns of the tax claim during the final stages of the subsidiary’s wind-up. The subsequent conversation between the departments is “interesting.”
Many tax matters, like the real-world scenario described above, fly under inside counsel’s radar. There are various reasons for the communication breakdowns. Fortunately, there are specific, proactive steps that inside counsel can employ to sufficiently identify, understand, and monitor tax matters.
Establishing a connection
The first step in establishing effective lines of communication with the tax department is to get to know the people. Schedule an informal meeting or lunch with the CFO or VP of Tax to discuss the general functions and organic structure. Gather essential information and collaborate to develop a reporting structure between the tax department and inside counsel that, at a minimum, clearly establishes what information must be communicated; when the information is communicated; and how (from and to whom) the information is communicated. In addition, it would be beneficial to schedule periodic meetings with tax department personnel to maintain the lines of communication.
Understanding the organization’s tax matters
Federal tax issues
Businesses face many federal tax issues, including regular compliance, planning and structuring issues, and the occasional, dreaded IRS audit. Inside counsel should be immediately informed of any federal tax audit. Inside counsel should help the tax department establish controls that include an audit docket that tracks the status of each active audit and corresponding appeal. Inside counsel should also be notified of any tax issues that exceed a certain materiality threshold or involve tax treatments that may fall outside of established IRS guidelines.
State and local tax issues
State and local taxes have historically been overshadowed by their higher-rate federal tax counterpart, yet they often present more-complex challenges. For instance, an organization often files monthly state sales and use tax returns, annual state income tax returns, and a variety of other periodic state and local returns involving other taxes. Moreover, state taxing authorities typically audit businesses on regular cycles, and the audit procedures may significantly vary from state to state. Many of those audits are never communicated to inside counsel. That should never happen.
Third-party tax firms
Most large organizations employ tax consulting firms or law firms to handle certain tax functions, such as tax compliance, audits and refund claims, and related appeals. The scopes of service vary wildly (handling limited audit issues to handling the entire audit), as does the fee arrangements (e.g., fixed, hourly, or contingency fee). Inside counsel should be involved early in the outsourcing process because it understands the implications of various fee structures and contracting issues involving third-party service providers.
The tax department and outside tax firms will also benefit from inside counsel’s involvement. Inside counsel typically has more expertise regarding evidence gathering, issue framing and procedural matters. The ultimate success of a tax matter will be increased by the collaboration of all three — the tax department, inside counsel and outside tax firm.
Moreover, inside counsel has a unique understanding of the available resources within an organization, as well as the most advantageous way to utilize those resources. For instance, many companies have in-house government affairs personnel or use third-party resources for government affairs functions. Inside counsel can facilitate a productive collaboration between these resources that may benefit a variety of tax matters: from proposing new legislation to negotiating with state tax agencies.
The communication of information should not be a one-way street. Inside counsel should collaborate with the tax department to communicate information that would assist proper tax planning determinations. Inside counsel is privy to information concerning every facet of an organization’s operations, from temporary staffing issues to compliance with environmental regulations. In turn, the tax department is responsible for making tax determinations based on tax laws, regulations and policies, many of which are driven by public policy considerations. For instance, a manufacturer may be eligible to purchase certain equipment and supplies that are exempt from sales tax if the items are required by law for environmental or public safety reasons. Inside counsel may be familiar with environmental regulations that could positively affect the company’s eligibility for tax exemptions.
Inside counsel should involve the tax department in issues with potential tax implications, such as construction contracts or significant capital expenditures, and at the earliest time possible. Seeking the tax department’s input will also have an indirect benefit: the tax department will be more likely to communicate related and unrelated information back to inside counsel. In turn, you will be a more-effective inside counsel to your tax department and organization as a whole.