Lawmakers Want Tax Disclosures Tougher Than FASB's

In a letter to President Bush, Senate Finance Committee ranking member Charles E. Grassley urged a sweeping review of disclosure requirements related to corporate income taxes. He wants more details on IRS Schedule M-1, and he wants someone other than the Financial Accounting Standards Board (FASB) to decide what is adequate tax footnote disclosure for financial statements.

Sen. Grassley says added disclosure could have "dramatic consequences for policing corporate fraud and policing taxpayers." His reasoning:

  • Book-tax differences are growing. This is reflected in a recent Statistics of Income Bulletin issued by the Internal Revenue Service (IRS). Much of the increase is attributable to corporations that report no income for tax purposes. Investors are entitled to know which companies fall into this category and why, especially if the reasons involve unpatriotic tax avoidance schemes. But investors are kept in the dark because companies are allowed to tell the taxman one thing and investors something else.

  • Improved tax disclosures might have helped Enron's investors understand the effects and magnitude of the company's undisclosed off-balance sheet financing. But current accounting standards obfuscate the effects. It is not even possible for investors to tell whether or not Enron was paying taxes. Neither the current portion of the tax provision nor the deferred net tax liability equates to, or is reconciled to, any actual payments to taxing authorities.

  • Concerned tax practitioners point out that improved disclosures would also have helped investors of WorldCom and other companies. These practitioners have urged Congress, the Securities and Exchange Commission (SEC) and the IRS to consider adopting a single comprehensive requirement that would reconcile the differences between public companies' book and tax income statements and balance sheets.

  • Added disclosures might also help the IRS collect taxes from tax dodgers and set fair policies for all taxpayers. Rep. Lloyd Doggett, who has drafted legislation requiring companies to disclose and explain the gap between book and taxable income, says, "A corporate culture of creative accounting and reporting abuses weakens our economy, allows some to dodge paying their fair share of our national security needs, and increases the taxes paid by honest Americans."

In his letter to President Bush, Sen. Grassley reported that Treasury Secretary Paul O'Neill agrees changes are needed. But SEC Chairman Harvey Pitt thinks the disclosures required by FASB's standards are adequate. Sen. Grassley notes that FASB is still controlled by companies and accounting firms, including the users and promoters of the tax avoidance schemes obscured by current accounting standards, so it is important that the review of the tax footnote be independent of FASB. FASB Chairman Robert Herz noted that the underlying issue is one of whether there should be public disclosure of corporate tax returns and this is "a public policy issue that is not really in our purview."

You may like these other stories...

School tax breaks get House support as Democrats objectRichard Rubin of Bloomberg reported that the House of Representatives on Thursday voted to expand and simplify tax breaks for education as Republicans continue to pass...
Many senior US tax professionals believe that a streamlined audit process will be the top benefit resulting from the IRS Transfer Pricing Audit Roadmap, a new toolkit organized around a notional 24-month audit timeline,...
Tax accounting to be simplified for money-market fundsThe US Securities and Exchange Commission (SEC) voted 3-2 on Wednesday for sweeping changes to institutional money-market funds, Emily Chasan, senior editor of...

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.