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

On February 7, 2006, The Tax Executives Institute met with Deborah M. Nolan, Commissioner of the IRS' Large and Mid-Size Business Division, and other representatives of LMSB. TEI President Michael M. Boyle led the Institute's delegation to the meeting. Note: These minutes were prepared by Tax Executives Institute, and although reviewed by the IRS Large and Mid-Size Business Division, they have not been formally approved by the agency.

On behalf of the Large and Mid-Size Business (LMSB) Division of the Internal Revenue Service, Commissioner Deborah M. Nolan welcomed TEI President Michael P. Boyle and the other members of the delegation from Tax Executives Institute to the liaison meeting. LMSB's delegation to the liaison meeting are set forth below. TEI's delegation is listed on page 253.

1. Opening Comments

   Mr. Boyle expressed his appreciation to LMSB Commissioner Nolan and other LMSB officials for meeting with TEI. He noted that TEI and LMSB do not always agree with each other, but appreciate the opportunity to discuss matters in a professional manner. Ms. Nolan expressed her appreciation for LMSB's good relationship with TEI, adding that if the two parties always agreed, the value of TEI's input would not be as great.

2. Schedule M-3

   Mr. Traubenberg commended the government for the recent issuance of Notice 2006-6, which provides that the book-tax difference category of reportable transactions under Treas. Reg. 1.6011-4 is no longer necessary. As a result, he noted, taxpayers that complete Schedule M-3 and disclose their financial and tax accounting reporting differences are no longer required to file Form 8886 and separately report significant book-tax differences.

   Mr. Traubenberg raised a question about the effective date of the notice, which refers to transactions occurring on or after January 6, 2006. He suggested that the IRS and Treasury Department consider making the effective date 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). He explained that 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, making the filing of Forms 8886 occurring in the five-day stub period redundant.

   Ms. Petronchak acknowledged that some confusion exists concerning the effective date of the notice. She explained that taxpayers filing a return after January 6, 2006, are not required to file the Form 8886. She added that the IRS will issue an FAQ soon to clarify the matter. Mr. Traubenberg thanked the IRS for its sensible approach to the issue.

   Mr. Traubenberg inquired whether the information gleaned from the Schedule M-3 meets LMSB's needs, or alternatively, whether there are other initiatives under consideration to enhance disclosures, curb tax shelter activities, or promote settlement of outstanding disputes. Ms. Nolan responded that the division is still evaluating the information submitted on the returns filed to date so LMSB is not in a position to say whether changes to the current Schedule M-3 filters are warranted. When the statistical analysis is completed, LMSB will review whether the lines on Schedule M-3 should be refined and also determine whether page 4 should be added to the schedule in order to pose questions to obtain additional information that would be helpful in identifying higher-risk tax returns or transactions.

   Mr. McCormally inquired whether LMSB has identified any trends that would limit the scope of examinations for certain taxpayers. Ms. Nolan emphasized that the Schedule M-3 is to be used as a "select and de-select" tool for future examinations. She noted that the IRS has already identified approximately 500 returns for further examination based on their 2005 Schedule M-3s. In addition, another 100 cases scored high for further examination under the old legacy system, but based on their Schedule M-3 did not warrant further examination. She offered to share any data from the review with TEI, adding that the division is still considering what follow-up is needed in respect of incomplete disclosures.

   Ms. Nolan invited feedback from TEI concerning the process. Mr. Traubenberg said that the cost of complying with the Schedule M-3 is significant, noting that the cost to his company of outsourcing preparation of the form was approximately $100,000. He asked whether other forms, such as a Schedule M-4 or M-5, were under consideration. Ms. Nolan replied that the IRS has no plans to require additional schedules other than adding Schedule M-3 to the returns for partnerships (Form 1065), Subchapter S Corporations (Form 1120-S), life insurance companies (Form 1120-L), and property and casualty insurance companies (Form 1120-PC).

3. Sarbanes-Oxley Documentation

   Ms. Twinem referred to section 404 of the Sarbanes-Oxley Act of 2002, which requires companies to document and support the tax benefits that are reflected in their financial statements. She asked whether LMSB anticipates issuing standard information document requests (IDRs) to request taxpayers' section 404 documentation.

   Ms. Nolan said that the IRS is strengthening its relationship with the Securities and Exchange Commission, noting that the IRS Commissioner and SEC Chairman have met to discuss various issues. She emphasized that, because of section 6103 of the Internal Revenue Code, the discussions have not been taxpayer-specific. The tax agency is also reviewing the effect of changes to SFAS 109, Accounting for Income Taxes, on tax administration, as well as whether LMSB may be able to leverage the greater transparency prompted by Sarbanes-Oxley. In addition, LMSB has had preliminary discussions with the Office of Chief Counsel concerning whether the information in the section 404 workpapers might be useful to the audit team. She invited feedback from TEI concerning what documentation, if any, would further the IRS's goal of increased taxpayer transparency. The IRS has little experience in this area, she added.

   Ms. Nall remarked that her audit team recently requested all of the company's section 404 workpapers. Believing that the voluminous information would not be helpful, she worked with the team by reviewing the scope of the section 404 workpapers with them and providing a copy of the management letter summarizing internal control items. The matter was ultimately resolved when the IRS auditors decided that the information would not be relevant to the issues under examination.

   Ms. Nolan stated that it is too early to determine whether issuing a standard IDR for such documentation would be useful, adding that the IRS would not be well served by the production of massive amounts of irrelevant...