Absolute responsibility and corporate tax governance.

• Author: Rashkin, Michael D.

There have been many recent economic and societal changes that directly impact the tax management of a company. The Enron debacle, the Sarbanes-Oxley Act, and the tax shelter frenzy are some of the more publicized significant events that have affected tax management and ushered in a new era of tax governance. Corporate tax managers, ** such as myself, are well aware of these events, and know they have to deal with them in some manner. Clearly, greater control, ethics, and responsibility are now mandated. But what management changes are required and how do we implement them in our departments?

It has been more than 20 years since I wrote an article on tax management for the July 1980 issue of The Tax Executive entitled "Tax Professional to Tax Manager: The Transition." (32 Tax Executive 290.) I have not thought about this article for a while, but after recently rereading it, have concluded that, with the addition of some new management and control mechanisms, it can provide an answer to how we can respond to today's management environment. The thesis of the 1980 article is that there are many activities occurring in a company that affect its tax situation, and it is the job of the tax manager to be aware of and respond to these activities. Unlike a tax consultant who is there to render advice on a given fact pattern, a tax manager has to be aware of and respond to changes in circumstances.

Tax Dynamics

Change is a critical dynamic that must be monitored and managed. Tax managers must be concerned with changes in laws, ideas, employees, audit guidelines, rulings, and facts. These are a company's tax dynamics. Tax dynamics are simply those changes that can affect a company's tax situation. Tax dynamics are in turn divided into macrotax and microtax components. The macrotax components are those tax dynamics that affect corporate tax strategy or significantly affect the company's effective tax rate. Microtax components are tax dynamics in the nature of project-related activities, such as income tax compliance (which represent the nuts and bolts of tax department operations) and not the planning or strategy. The article recommended that a tax manager divide the tax dynamics of the company into microtax and macrotax components and assign them to tax department employees based upon their skill level. The article only touched briefly on one important prerequisite to the successful implementation of a tax dynamics plan--the concept of tax responsibility.

I first expanded on tax responsibility in connection with tax dynamics when I spoke on the subject at the TEI Annual Conference in 1980. My contention was that tax responsibility goes beyond ethical responsibility: For a corporate tax manager, it means that he or she assumes absolute responsibility for whatever goes wrong in a company's tax situation. This concept was not wholly accepted at the conference, perhaps because not all tax managers agree on the role of the tax manager. Here are a few examples of mistakes and transgressions, for which I believe that a tax manager must take absolute responsibility.

Tax Preparation

In preparing tax return of a corporation, tax depreciation is computed using longer lives than is allowed by law. When the issue is discovered on audit, the examining agent refuses to accept any correction reducing these lives. Although the corporate tax manager did not personally review the tax depreciation reported in the tax return, he or she is responsible for the resulting overpayment in taxes regardless of whether the return had been prepared by an outside firm or by the...