A systematic approach to tax controversy management.

• Author: Miller, Craig D.

The past ten years have brought two significant changes in the nature of the federal tax controversies. Historically, virtually all federal tax controversies were settled. Most are still settled today. Today, however, many taxpayers find settlement virtually impossible short of total surrender. The second change is the increased factual focus of tax controversies. A critical element, if not the critical element, for a large number of disputes is what are the facts. Section 482 pricing cases and tax inventory accounting cases are two examples of when this occurs.

This article describes a risk assessment a roach that can assist tax managers and other members of company management in dealing with this new environment in an effective and cost efficient manner. Reliable, detailed information concerning the uncertainties of a tax dispute is essential to good decision-making. When employed by individuals experienced with its use and with the resolution of tax controversies, the assessment yields reliable and useful information about the range of potential outcomes, the likelihood of each outcome, and the present dollar value of each. Armed with that information, and taking other relevant factors into account -- such as whether the dispute involves a one time or repeating issue and the cost to litigate -- company management can make informed decisions. They can shape the company's strategy more effectively and work toward a resolution that is in the company's best interest. In short, they can make smart "fight" or "settle" decisions.

The Nature of the Assessment Process

The necessary information concerning dispute uncertainties for routine, small-dollar controversies can usually be obtained through a top level or back of the envelope type of assessment. Little, if any, factual or legal research is required. Larger, complex cases require a more careful analysis. Relevant facts and legal precedents must be researched. Pertinent documents must be reviewed, and individuals with relevant information must be interviewed. Critical to this analysis is an organized and systematic methodology that ensures that all of the relevant factual and legal issues are considered. The analysis is of little or no value if important issues are overlooked or given inadequate attention.

The curricula of business schools offer tools that are of great assistance in avoiding those problems. The two most important are 'influence diagrams' and "decision trees." These tools can...