From Paul Caron:
Bret Wells (Houston) has posted Adopting the More Likely Than Not Standard for Tax Returns, 127 Tax Notes 451 (April 26, 2010), on SSRN. Here is part of the abstract:
Under current law, a taxpayer may generally take a tax return position without penalty or disclosure if there is substantial authority that the position will be sustained if challenged. Taxpayers can therefore take positions that they believe are unlikely to be right, but might be.
The disclosures under Financial Accounting Standards Board Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes,’’ show that companies have failed to pay billions of dollars of taxes they think are legally owed according to their tax returns.
A country needing tax revenue should collect the taxes that are rightfully owed before it seeks to raise additional taxes, and the FIN 48 disclosures reveal billions of dollars lost to noncompliance. This proposal would require taxpayers to report on their tax return only positions that they believe are more likely than not correct.
With this new higher standard, the tax system could rely on financial reporting standards to better enforce compliance with the tax law.
It’s hard enough for taxpayers and their return preparers to determine whether or not there is substantial authority for a tax position, making them determine whether it is more likely than not the correct position is absurd.
If adopted, this would be yet another instance of the IRS trying to force tax advisors to do its job for them. It’s unacceptable and creates a conflict of interest between tax preparers and their clients.
I agree with Wells that we should be trying to close the tax gap before we raise taxes, but attempting to do that by making taxpayers fearful of taking controversial positions is not the way to do it.
We should close the tax gap by stepping up enforcement, not by changing the standards by which taxpayers and their preparers file returns.
4 responses so far ↓
1 Knox Marlow // Aug 17, 2010 at 1:30 pm
I’m not sure how to characterize Mr. Wells’ proposal. His bio suggests that he has a background in the tax law and in-house tax experience. However, the tone of the abstract is naive at best, intentionally misleading at worst. A few observations:
(1) Wells claims that “billions of dollars [of tax revenue] are lost to noncompliance.” That’s patently incorrect. Taxpayers that file returns based on substantial authority positions are complying with existing law.
(2) Wells suggests that taxpayers are gaming the system by taking positions they believe are losing positions. However, the difference between a MLTN position and substantial authority position most often reflects fundamental uncertainty about the law (or the application of the law to the facts).
(3) The IRS and Treasury are completely overwhelmed in their attempt to administer the tax laws. They can’t issue regulations or other guidance fast enough to keep pace with new tax laws and new responsibilities to administer social welfare programs (e.g., health care). This increases the uncertainty that taxpayers confront in attempting to apply the tax laws.
(4) Rather than increase the tax filing standard, why not increase the IRS and Treasury resources dedicated to letter rulings and, more important, publishing guidance? A taxpayer should be able to seek binding guidance on an uncertain tax position without spending $100k or more navigating the system. Wells is focusing on the wrong link in the overall chain. Taxpayers are, generally speaking, trying to do their best in the face of labyrinthine federal and state income tax rules characterized by major pockets of uncertainty.
(5) FIN 48 is an arbitrary accounting pronouncement issued by a small number of individuals who don’t appreciate life in the “trenches” from a tax perspective. It was originally intended to improve the accounting for income taxes (at great cost and, in my experience, with little benefit). Now the IRS and academics want to use this arbitrary accounting pronouncement as a “gospel” to guide new tax compliance initiatives. It’s madness.
(6) Finally, I note that FIN 48 applies to all income taxes — not solely U.S. federal and state income taxes. Without more data, we don’t know the breakdown of uncertain domestic versus foreign uncertain tax positions. It’s certainly possible that taxpayers assume less risk on U.S. federal and state tax returns, while assuming more risk on foreign tax returns.
Thanks for posting
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