Comments on Schedule M-3: reducing burden and duplication.

July 7, 2011

In a letter dated July 7, 2011, to the Honorable Douglas H. Shulman, Commissioner of Internal Revenue, TEI President Paul O'Connor urged the IRS to revamp the format and information required to be disclosed on IRS Schedule M-3 and even to consider abandoning use of the form. TEI's comments were prepared under the aegis of a task force of members from the Federal Tax, International Tax, and IRS Administrative Affairs Committees. Jeffery P. Rasmussen, TEI Senior Tax Counsel and legal staff liaison to the Federal Tax Committee, coordinated the preparation of the comments.

Upon release of the final version of Schedule UTP, Uncertain Tax Position Statement, for 2010, the IRS announced the creation of an internal working group to study and revise the Schedule M-3, Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More. The Announcement explains that "the implementation of Schedule UTP is likely to reduce the need for some of the information currently reported on the Schedule M-3." The IRS working group is expected to work with external stakeholders to develop revisions to Schedule M-3.

As the preeminent association of in-house business tax professionals worldwide, Tax Executives Institute (TEI) appreciates the opportunity to submit comments on the burdens and utility of Schedule M-3. Our approximately 7,000 members represent 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with financial and tax reporting requirements--and the differences between them captured and reported on Schedule M-3--arising from the operation of business enterprises. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.

Purpose of Schedule M-3

Schedule M-3 replaced Schedule M-1 for certain Form 1120, U.S. Corporation Income Tax Return, filers, effective for tax years ended December 31, 2004. The initial Schedule M-3 was subsequently used as a model for similar schedules for partnerships filing Form 1065 and corporations filing Forms 1120-L, 1120-PC, and 1120-S. A special Schedule M-3 applies to foreign corporations filing Form 1120-F.

Schedule M-3 provides the IRS with information about corporation and partnership financial statements (hereinafter "book income") and reconciles the differences between book income, losses, and expenses and tax income, losses, and deductions. Schedule M-3, Part I, identifies the source of book income, and reconciles the financial reporting entity to the tax reporting entity by listing the affiliated entities that are included in the financial reporting entity but not in the consolidated tax reporting entity (and vice versa). Part I of the form also asks questions about a corporation's or partnership's financial statements; reconciles financial statement net income (loss) to the corporation's or partnership's net income for the U.S. group; and reconciles worldwide assets and liabilities of entities included for financial statement purposes but not the tax return (and vice-versa). Schedule M-3, Parts II and III, require disclosure of amounts for selected "tax-sensitive" book items; disclosure of related permanent and temporary book-to-tax differences for the items; and shows the income, loss, or deduction amount per the filer's Form 1120 (or 1065). Some Schedule M-3 fliers (principally life and property and casualty insurers) must also file Form 8916, Reconciliation of Schedule M-3 Taxable Income with Tax Return Taxable Income for Mixed Groups. Finally, Form 8916-A, Supplemental Attachment to Schedule M-3, may be required to report additional detail on costs of goods sold, interest income, and interest expense. Unless the context requires otherwise, the comments in this letter are directed to the forms collectively as "Schedule M-3."

In developing Schedule M-3, the IRS and Treasury Department reached out to stakeholders, including TEI, for input on the schedule's design, instructions, and potential burdens. TEI was pleased to participate and commends the IRS for working collaboratively with stakeholders to review the utility and burdens of the Schedule. The Schedule is now "seasoned" by several years of compliance and examination experience, so a review of the burdens and utility is timely, especially with the introduction of Schedule UTP.

To develop its recommendations, TEI chartered a task force of members to share both their expertise in the compliance burdens spawned by Schedule M-3 and their experience with how agents employ the schedule as an examination tool. Members of the group would be pleased to meet with the IRS working group to elaborate on our comments and recommendations.

Schedule M-3 Reporting Burdens

  1. Implementation. The primary challenge in implementing Schedule M-3 is mapping book income accounts to produce column (a), Income (Loss) or Expense per Income Statement, of Parts II and III of the schedule. This mapping may vary from the mapping required to produce other lines or forms in the return. Indeed, for most taxpayers, very few general ledger accounts for income or expense will map directly to the lines or categories in column (a) of Parts II and III of Schedule M-3. As a result, significant time was required, whether by tax department personnel or outside vendors, to review and map each account. Since nearly all Schedule M-3 filers must e-file their returns, the data entry requirements to produce the form depends on the tax software used. In many cases, new book accounts (or sub-accounts) were created in order to disaggregate book amounts and map specific transactions or amounts to different lines of column (a) in Parts II and III. In other cases, manual workarounds (e.g., spreadsheet-based worksheets) were developed in order to make the required reclassifications to arrive at the column (a) amount and to ensure that related book-tax differences were also mapped to the correct lines of columns (b) and (c).

    Quantifying the direct costs for the initial implementation of Schedule M-3 reporting is difficult. Companies that outsource tax return preparation often have fixed-fee arrangements so the incremental costs of implementing Schedule M-3 were unavailable. Some taxpayers reported an increase in their license or consulting fees for the implementation and subsequent tax year(s), but the portion directly attributable to Schedule M-3 preparation is not available. Companies that undertook mapping their general ledgers to the tax compliance software to produce the new Schedule M-3 reported that personnel from several departments, but most often the tax department, spent many hours on the exercise. One small company, for example, devoted one third of its total tax department personnel for two weeks, and some personnel for up to four weeks, to map the general ledger. A larger company with 170 subsidiaries, multiple general ledgers, and multiple enterprise resource planning (ERP) systems, required between five and six weeks' time from a significant portion of its tax department to complete the initial mapping. Although the costs of company tax department, general...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT