IRS plans to seek additional records on tax shelters

Saturday, June 22, 2002

WASHINGTON -- In an aggressive effort to shut down abusive corporate tax shelters, the Internal Revenue Service plans to begin demanding that companies and accountants turn over sensitive internal work papers that the agency in the past has largely left alone.

The papers it will seek, sometimes called tax accrual work papers, can amount to a guide to all the questionable tax strategies a company has employed, along with their accountants' assessment of the chances the IRS will disallow them, tax experts say.

The shift comes at a time when the IRS is struggling to increase its audit rates of individuals and businesses and to make the audits more effective. The agency was pilloried on Capitol Hill in the late 1990s for allegedly heavy-handed tactics, and then restructured.

Since then, the use of tax-avoidance schemes by both individuals and corporations has exploded. Many accounting firms, lawyers, investment bankers and consultants have gone into the business of devising shelters, which generally are transactions whose primary purpose is reducing taxes. But the IRS often cannot find the shelters that violate the tax code because they are lost in the underbrush of the tax return.

The work papers appear to offer an effective brush-cutting tool.

"If someone has access to those work papers, it would give them a road map to what the CPAs thought were aggressive positions taken" by the corporation, said Thomas P. Ochsenschlager of the accounting firm Grant Thornton.

Although the IRS has had the right for several decades to demand the work papers, the agency held off, deeming it too intrusive to do so.

Accountants' assessment

Tax accrual work papers are typically prepared by accountants for corporations so that the companies know how much money to reserve in case a tax strategy is disallowed. The papers usually lay out the accountants' assessment of questionable tax positions the company has taken, and the chances that any of them would be rejected by the IRS.

The accountants then recommend that the company place reserves on its balance sheet against that possibility. The riskier the tax position, the larger the reserve.

Under the new IRS policy, companies that engage in one abusive transaction will be forced to disclose the work papers for that transaction, Williams said.

The new work papers policy, which applies only to businesses, becomes effective for returns filed after June 30.

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