The tax deadlines of March 15 and April 18 (and April 19 for the lucky folks in Maine and Massachusetts) are behind us; but it is always incredible how some taxpayers come up with interesting reporting positions during tax season. Every year, I get several phone calls from outside parties doing rounds of opinion shopping.
In these conversations—and when providing the necessary services for clients—the key for us is always a reasonable position supported with technical analysis. Relevant facts and information are integral to decipher and determine appropriate positions. Without them, there is no reason to continue. Rushing to conclusions usually has future repercussions and possible unwarranted apprehensions, while extensions to file can help facilitate time to review and make an appropriate decision. Risk in tax matters cannot be taken lightly. Careful tax planning is a must when considering the multiple thousand taxing jurisdictions in the United States and abroad.
Tax planning involves the design of transactions and possible implementation of new business structures or programs that produce a favorable tax result. Tax consequences of most activities and transactions must be clear. Interpretation of certain tax laws may be less certain, and taxpayers can take positions on filing their tax returns that differ from those of revenue authorities. Depending on the aggressiveness of the tax-filing position taken and the expected tax benefit, approval by management should be mandatory.
Management, owners, and possibly the board of directors should consider whether appropriate specialized outside tax advice should be sought out. Where a tax plan involves risks related to complex areas of taxation including the involvement of one or more foreign taxing jurisdictions, or proposals developed by in-house tax personnel without the requisite tax knowledge, then management needs to be briefed. The responsible party for tax positions always fall on decision makers and ownership. A failed plan without a reasonable position is not prudent and should not be implemented or even considered.
Responsible parties should seek approval of management that proposed transactions meet the technical requirements of the law. The annual reconciliation of the company's effective and marginal tax rates is a key benchmark for possible examination and footnote disclosures in the company's financial statements are read by shareholders, bankers, and other interested parties. Significant variations from prior years and others in your industry can bring the validity of your net financial reporting into question as well as integrity of management. External auditors can play an important role in determining the disclosure of a specific tax planning transaction in financial statements and its implications. Management should involve external auditors early in the development of a new tax planning proposal.
Revenue authorities have broad powers to request working papers and other documents that may help them plan the scope of their audits. Management should inquire about the tax group's procedures for protecting the company's confidential tax planning information. One of the first requests in IRS practice and procedure is the review of any financial statements prepared by the company. Current GAAP (generally accepted accounting principles) requires disclosures for certain reporting transactions. The footnotes can be a road map for a revenue agent to follow.
The risk in tax matters is the penalties assessed by taxing agencies. Penalties come in the form of accuracy related penalties for substantial understatement of income tax, along with the tail of interest charges running on top of the tax assessment and time. Penalties imposed by governmental agencies promotes compliance. The best advice is to plan well in advance before tax positions are taken.