IRS Tax Whistleblower Articles
By Jeremiah Coder
Fortune 500 firms recorded a collective total of $187.5 billion in tax reserves on their 2011 financial statements, a decrease from prior years even as corporations reported higher profits, a study by the Ferraro Law Firm announced on September 10.
The same study in 2010 found companies claiming $200 billion as unrecognized tax benefits. The dip has practitioners wondering if the IRS's newly implemented uncertain tax position reporting regime has caused firms to establish fewer reserves. (For the 2012 study, see Doc 2012-18887. For prior coverage, see Doc 2010-19323 or 2010 TNT 170-1.)
The top five firms in terms of largest recorded tax reserves for 2011 are: Pfizer Inc. ($7.309 billion); J.P. Morgan Chase & Co. ($7.189 billion); Microsoft Corp. ($6.935 billion); General Electric Co. ($6.384 billion); and AT&T Inc. ($5.853 billion). Scott A. Knott of the Ferraro Law Firm told Tax Analysts that Fortune 500 corporate profits were up 16 percent in 2011, while their corresponding tax reserves were down 5 percent. "With corporate profits increasing, it is natural to think that taxes and reserves would also increase, but it seems that base erosion is instead leading to lower tax numbers," he said.
Knott said that in light of UTP reporting requirements, companies are likely interested in how they calculate reserves relative to their peers. "It is possible that Schedule UTP is more likely to have companies not establish a reserve for an issue if they can avoid it," he said, adding that while anecdotal evidence points to that conclusion, it is hard to quantify with solid data.
George A. Hani of Miller & Chevalier said it is possible that the decrease in aggregate tax liability reserves by the Fortune 500 has been a result of the UTP reporting regime. "I know that for a good number of companies, the prospect of submitting a Schedule UTP caused them to take steps to eliminate uncertainty and therefore reduce the reserve number," he said, noting that some businesses took proactive steps with the IRS to address the uncertainty while others simply took more conservative positions on the return.
But not all items reflected in a taxpayer's tax reserve are for issues on which the taxpayer believes the government has the better case, Hani said. "The reserve also includes items for which the taxpayer believes its position is more likely than not to succeed," he said. But, he added, the second step of the analysis under Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," requires some amount to be reported in the reserve because of some amount of uncertainty. "I know of large taxpayers whose only issues in their reserves-- and only issues on Schedule UTP -- are for issues [regarding which] the taxpayer believes it has the better case than the government," Hani said.
Reserves and Whistleblowers
The proposition that tax reserves represent a prime source of claims for tax whistleblowers generates strong debate among practitioners. The Ferraro Law Firm believes that because the components of a company's tax reserve are generally not disclosed to the IRS and remain hidden in the tax accrual workpapers, the workpaper details can "make for valuable tax whistleblower submissions." Practitioners at the firm have submitted numerous whistleblower claims to the IRS on behalf of tax informants alleging over $100 billion in tax underpayments by companies.
But other tax practitioners find such conclusions dubious. "In general, to draw a connection between any supposed trend in tax reserve numbers and the whistleblower statute is tenuous, to say the least," said David Blair of Crowell & Moring LLP. Companies compile their tax reserves in light of the requirements of FIN 48 and not with an eye towards potential whistleblower claims, he said.
"It is also, frankly, misleading to characterize tax reserve reporting as a statement that a corporation believes it has underpaid its taxes," Blair said, adding that a tax issue may be uncertain even if the taxpayer strongly believes that its position on the question is correct, and this uncertainty creates a need to estimate. "That is very different from acknowledging an underpayment of tax," he said.
Hani said that tax reserves could be a source for successful whistleblower claims under section 7623. He said he thought that some claims likely do address issues that are in the taxpayer's reserves but said it was inappropriate to view all tax reserves as willful underpayments.
Whether the IRS will use Schedule UTP listings to deny award payments in whistleblower claims is unknown, Knott said, but he believes it is unlikely. "I doubt that Schedule UTP will poison the well for whistleblower submissions, because our packages are more detailed and substantive than the concise descriptions put on the schedule," he said.