IRS to Expand Requests for Tax Accrual Workpapers

As part of its crackdown on abusive tax shelters, the Internal Revenue Service (IRS) has announced it will be making more requests for tax accrual workpapers. These requests may also extend to other financial audit workpapers that relate to the reserve for deferred tax liabilities and footnotes about contingent tax liabilities. Under powers given the Service in 1984, the IRS can request and, if necessary, summon these workpapers, but until now it has used the power only in what it calls "unusual circumstances."

A change in policy announced on June 17, 2002 warns taxpayers that the circumstances will now be considered sufficiently unusual if the taxpayer uses a tax shelter the IRS considers abusive. Under the new policy, the IRS will invoke its power to summon the workpapers as follows:


  • For returns filed prior to July 1, 2002, the IRS will regularly request the tax accrual workpapers, if the taxpayer did not make the required disclosure of the abusive transactions.


  • For returns filed on or after July 1, 2002, the IRS will use several factors, including whether or not the abusive transaction was disclosed, to make decisions as to: (1) whether the request will be routine or discretionary, and (2) whether it will be limited to the abusive transaction, rather than all the workpapers. The factors include whether the transaction is a listed transaction, whether there are multiple investments in listed transactions, and whether there are reported financial accounting irregularities, such as those requiring restatement of earnings.

IRS Chief Counsel B. John Williams explained, "This new policy encourages taxpayers to avoid overly aggressive transactions. It brings a new vitality to our self-assessment system and changes the risk calculus to make investing in overly aggressive transactions a very costly proposition."

Observers have suggested that the change in policy increases the risk to the company because the workpapers, which are generally prepared jointly by the company and its accountants, can provide the IRS with a convenient guide to the company's more aggressive tax positions.

Additional details will be available in Internal Revenue Bulletin 2002-27 dated July 8, 2002.

-Rosemary Schlank

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