Internal Revenue Service (IRS) Commissioner Douglas H. Shulman addressed the 2009 National Association of Corporate Directors Conference on October 19, 2009. In his remarks, Commissioner Shulman discussed the importance of involving boards of directors in overseeing corporate tax risks and strategies. His emphasis was to offer attendees a number of suggestions for managing task risks and FIN 48 compliance. (FIN 48 establishes the financial statement accounting for uncertain tax positions, including recognizing and measuring their effect on financial statements).
Shulman suggests, as part of board members’ ongoing corporate responsibilities, that boards of directors implement a mechanism to oversee tax risks. According to Shulman, boards should consider the following actions:
- Set a threshold confidence level for taking a tax position and review major tax positions.
- Discourage or eliminate opinion shopping by tax departments by engaging an independent tax firm, which has some direct dialogue with the board of directors.
- Specifically address transfer pricing and the relative profit allocated to low-tax jurisdictions, and make sure they reflect real economic contributions made in those jurisdictions.
In his speech, Shulman also discussed FIN 48 compliance as a, “very significant window into tax risk, liability and management in your company.” He recommended that boards consider asking their tax director and external auditors the following questions relating to FIN 48 compliance:
- What was the process for identifying uncertain tax positions and how do you know all material issues have been identified?
- How did you go about determining the maximum tax exposure relating to each uncertain tax position? What makes you comfortable that it accurately reflects your maximum exposure?
- How did you go about quantifying the likelihood of winning or losing uncertain tax positions? Do you plan to litigate the issue if the IRS challenges the position? Does the external auditor or tax advisor agree with the tax director’s assessment?
- Could the company be subject to potential penalties, such as for underpayment of tax, negligence or worse? If so, are they appropriately recorded, and perhaps more important, what does this say about how aggressive the company’s position is regarding those issues?
Shulman emphasized that taxes are no different than any other large expense in that responsible management should try to control it, he stated. However, Shulman reminded the audience that, “In the case of taxes, controlling it can expose the company to challenge, which can result in reputational damage and perhaps large, unexpected expenses.”
His recommendation is that boards need to have a close understanding of how their management has chosen to control the tax expense, and how aggressive they have decided to be. In addition, reporting must be effective. Shulman concludes by stating that as with any expense, “ Manage it (taxes) too loosely and you give up profit. Manage it too aggressively and there are bad consequences.”