IRS Tax: Corporate boards must oversee tax compliance, IRS commissioner says

Internal Revenue Service Commissioner Douglas Shulman on October 19 advised corporate boards to keep tax issues on their radar screen. In prepared remarks to executives attending a National Association of Corporate Directors conference, Shulman called for increased oversight of tax compliance by corporate boards of directors, stating that they are "critically important to making sure that the tax system works well and is worthy of the confidence of the American people."

Shulman suggested that corporate boards:

- Set a threshold confidence level for taking a tax position;

- Discourage or eliminate opinion shopping by tax departments by having an independent tax firm, which has some direct dialogue with the board of directors, review major tax positions; and

- Specifically address transfer pricing and the relative profit allocated to low-tax jurisdictions, and make sure they reflect real economic contributions made in those jurisdictions.

Shulman also suggested that boards of directors delve deeper into their company's income tax disclosures relating to uncertain tax positions. The accounting for income tax uncertainty provided in the Accounting Standards Codification Topic 740, Income Taxes (previously contained in Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes) clarifies the financial statement accounting for uncertain tax positions and requires that companies identify and recognize material uncertain tax positions. Shulman said corporate boards should ask their tax directors and external auditors these questions:

- What was the process for identifying uncertain tax positions and how do you know all material issues have been identified?

- How did you go about determining the maximum tax exposure relating to each uncertain tax position? What makes you comfortable that it accurately reflects your maximum exposure?

- How did you go about quantifying the likelihood of winning or losing uncertain tax positions? Do you plan to litigate the issue if the IRS challenges the position? Does the external auditor or tax advisor agree with the tax director's assessment?

- Could the company be subject to potential penalties, such as for underpayment of tax, negligence or worse? If so, are they appropriately recorded, and perhaps more important, what does this say about how aggressive the company's position is regarding those issues?

Shulman said the board of directors must put policies and procedures in place to allow them oversee tax strategies and monitor risks.