Minutes of TEI - LMSB liaison meeting: February 12, 2007.

• Position: Tax Executives Institute, large and mid-size business

On behalf of the Large and Mid-Size Business (LMSB) Division of the Internal Revenue Service, Commissioner Deborah M. Nolan welcomed TEI President David L. Bernard and the other members of the delegation from Tax Executives Institute to the liaison meeting. LMSB's and TEI's delegations to the liaison meeting are set forth above.

Opening Comments

Mr. Bernard 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, but TEI appreciates the opportunity to discuss matters in a professional manner. Ms. Nolan expressed her appreciation for LMSB's good relationship with TEI, saying that the meeting provides an opportunity for LMSB to obtain feedback about what is or is not working, and to help create shared understanding of some of the IRS's initiatives. She added that the liaison meetings are only one avenue among many for meeting with TEI, noting the many informal contacts with TEI officers and staff and LMSB officials' participation in chapter, regional, and Institute meetings.

Transparency-Related Issues

1. Financial Interpretation Number 48. Mr. Bernard referred to Financial Interpretation Number 48, which requires companies to make additional financial statement disclosures relating to uncertain income tax positions, including a tabular roll forward of the total amount of unrecognized tax benefits and disclosure and quantification of uncertain tax positions that may change in the subsequent 12-month period. He inquired whether the IRS plans to use these new disclosures, whether the interpretation will have any effect on the IRS's policy of "self restraint" in requesting tax accrual work papers or other documentation, and what the IRS's plans are for training agents to understand FIN 48.

   Ms. Nolan noted that in the previous year's liaison meeting TEI inquired Whether workpapers developed by taxpayers under section 404 of Sarbanes-Oxley would be routinely reviewed by the IRS. Based on the information supplied by TEI and others about the nature and scope of SOX 404 workpapers, LMSB concluded that those workpapers would rarely provide information relevant for examination purposes and should not be routinely reviewed. A similar deliberative process will be employed to evaluate the effects, utility, and relevance of FIN 48 disclosures and workpapers. She added that the IRS has been pursuing multiple initiatives to increase taxpayer transparency and the public disclosures required by FIN 48 will be useful in the IRS's risk analysis.

   Ms. Nolan acknowledged that taxpayers have raised concerns about the use of FIN 48 disclosures and underlying workpapers. The disclosures are public information and therefore will be reviewed by audit teams individually, and by LMSB research personnel more broadly. The FIN 48 workpapers are currently being treated as tax accrual workpapers and subject to the "policy of restraint". She explained, however, that IRS resource constraints, and transparency initiatives designed to improve the efficiency of the IRS, as well as taxpayers' desires for certainty and currency, may impel the IRS to reevaluate its policy of self restraint in seeking tax accrual workpapers. She pointed out that taxpayers that participate in the compliance assurance program (CAP) and pre-filing agreements (PFAs) collaborate more with the IRS in return for greater currency and certainty of tax results. She acknowledged taxpayers' concerns that the IRS might seek tax accrual workpapers, including FIN 48 analyses, in an opening information document request as a roadmap for conducting the audit. Regardless of whether they have access to the workpapers, agents would be expected to conduct examinations as they do currently--evaluate the taxpayer's facts and circumstances and apply the law--and seek the taxpayer's tax accrual workpapers only under prescribed conditions. She noted that, since the 2002 revision of the policy for seeking tax accrual workpapers, the IRS has issued only 117 requests for such workpapers. Consistent with Announcement 2002-63, most requests seek information about a taxpayer's participation in listed transactions; a few requests have arisen because of irregularities in the taxpayer's public financial statements.

   Ms. Nolan inquired what assistance taxpayers wish to see from the IRS in order to increase the certainty of their tax positions and cope with FIN 48's analytical and disclosure requirements. Mr. Bernard said that there are a number of open questions and issues about FIN 48's requirements. Most taxpayers, he said, are likely still calculating their cumulative adjustment and discussing the disclosure of the cumulative adjustment with their financial statement auditors. He added that it was unsurprising that the IRS will use publicly disclosed information in connection with its examinations. He inquired about the focus of the IRS's training program for FIN 48 and who is providing the agent's training. There is anecdotal evidence, he said, that if an agent discovered a 20-percent reserve for an issue, the agent would likely propose an adjustment approximating 20 percent of the taxpayer's claim.

   Ms. Nolan said that if an agent proposed a 20-percent adjustment without analyzing the underlying facts and circumstances, the Appeals Division would quickly reject the adjustment. She explained that there is a cadre of internal IRS financial accounting experts who will conduct the FIN 48 training, which is focused on what agents should expect to see in financial statements. LMSB will provide "training for the trainers" in May and training for agents between June and November. Mr. Adams added that the training is generic and explains how FIN 48 affects FAS 109. Mr. DeNard said the training program will likely evolve as the year progresses and the IRS gains a better understanding of FIN 48 as well as how taxpayers and financial statement auditors apply it. Mr. Traubenberg said that FIN 48 is much like the Internal Revenue Code: there are a number of gaps in the rules that need...