Tax Executives Institute - Internal Revenue Service large and mid-size business division liaison meeting: February 7, 2006.

On February 7, 2006, Tax Executives Institute met with Deborah Nolan, Commissioner of the IRS's Large and Mid-Size Business Division, and other repreesntatives of LMSB. TEI President Michael P. Boyle led the Institute's delegation to the meeting. The agenda for the meeting is reprinted below. Minutes of the meeting will be published in a future issue of The Tax Executive.

1. Introductions

   U. Transparency-Related Initiatives

   A. Schedule M-3.

   1. Based on a review of the Forms 8886, Reportable Transaction Disclosure Statement, and Schedules M-3 received during the 2005 filing season, the IRS and Treasury Department recently issued Notice 2006-6, which provides that the book-tax difference category of reportable transactions under Treas. Reg. [section] 1.6011-4 is no longer necessary. As a result, taxpayers who complete Schedule M-3 and adequately disclose their financial and tax accounting reporting differences are no longer required to file Form 8886 and separately report significant book-tax differences. The Notice is effective for transactions occurring on or after January 6, 2006. The IRS and Treasury Department anticipate issuing temporary and proposed regulations under [section] 1.6011-4 to remove from the categories of reportable transactions under [section] 1.6011-4(b)(1) the category of transactions with a significant booktax difference currently set forth in [section] 1.6011-4(b)(6).

      TEI commends the IRS and Treasury Department for concluding that the Schedule M-3 supplies substantially all the information that IRS agents require in order to examine significant book-tax accounting differences. Elimination of the duplicative reporting burden of Form 8886 was one of the promised benefits of implementing Schedule M-3. We recommend that the IRS and Treasury consider making the effective date of the coming regulations under Treas. Reg. [section] 1.6011-4 (or a second Notice) be for transactions occurring after December 31, 2005 (or, for taxpayers with 52-53 week fiscal periods, the end of the taxpayer's applicable fiscal period). As long as a taxpayer's tax period and return encompasses the effective date of the change, significant book-tax differences preceding the effective date will be disclosed on the taxpayer's return and Schedule M-3 even without the Form 8886. (1) Hence, the filing of Forms 8886 for significant book-tax difference transactions occurring in the five-day stub period will be redundant and imposes an unnecessary burden on taxpayers to identify and report the items. Indeed, the requirement to file Form 8886 could be eliminated retroactively for all book-tax difference transactions as long as the taxpayer's return includes a Schedule M-3 reporting all significant book-tax differences for the entire taxable period.

   2. Beyond the M-3.

      Does LMSB believe that the current tools designed to curb tax shelters are working or should be given additional time to work before additional changes are imposed by legislation or regulatory action? We invite a discussion of whether other regulatory initiatives are under consideration to enhance disclosures, curb tax shelter activities, or promote settlement of outstanding disputes. For example, is the IRS or Treasury considering additional tax return disclosures or general reconciliation schedules in addition to schedule M-3 for corporations (1120-C,-S,-PC, or -L) or partnerships (1065)?

   3. Sarbanes-Oxley Documentation.

      Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to document and support the tax benefits that are reflected in their financial statements.

      LMSB has indicated that the increased accountability for tax positions on financial statements will assist in the IRS's efforts to focus on high-risk issues and areas of noncompliance. For example, LMSB Commissioner Nolan recently stated that the division was studying the implications of increased corporate governance under the Act and the effect of accounting changes put in place by the Financial Accounting Standards Board. See Alison Bennett, LMSB Compliance Efforts to Be Focused on High-Risk Deals in 2006, Nolan Says, 2006-04 Daily Tax Report, G-1 (Jan. 6, 2006).

      During the liaison meeting, we ask for a status report on whether LMSB anticipates issuing standard information document requests to the field to request taxpayer's documentation prepared for purposes of complying with the Sarbanes-Oxley Act.

      B. Circular 230

   1. Commendation.

      On May 18, 2005, the IRS and Treasury Department released final regulations governing practice before the IRS. The revisions clarify that in-house tax practitioners are to be treated as a distinct category of tax professionals for purposes of Circular 230 and that written advice provided by in-house counsel to the employer for purposes of determining the employer's tax liability is excluded from the definition of a covered opinion under section 10.35 of Circular 230.

      TEI commends the IRS and Treasury Department for recognizing that the application of section 10.35 to in-house tax practitioners would have raised numerous issues and might have impaired the provision of sound and timely tax advice to the practitioner's...