Companies keep two sets of books—one for financial accounting and one for tax filing. But a new proposal from the Internal Revenue Service would make them synchronize the two sets of numbers.
The proposed form, known as Schedule M-3, would force corporate taxpayers with assets of more than $10 million to disclose additional information about the difference between financial accounting and taxable income, and reconcile net income or loss in the income statement to taxable income.
The new filing will make it easier for IRS agents to spot inconsistencies that could reveal aggressive tax treatments or even fraudulent accounting. Treasury assistant secretary for tax policy Pam Olson says the rule will cut down on unnecessary audits and allow agents to focus on aggressive positions more quickly. "The increased transparency will have a deterrent effect," she says.
The move is part of a general crackdown on aggressive tax treatments by the IRS. "The increased attention to tax-avoidance activities by firms is clearly part of the motivation for the IRS's wanting to get additional information," notes George Plesko, an assistant professor of management at MIT's Sloan School. And it shouldn't present companies with too much additional work, he argues. "It generates additional for the IRS while imposing relatively little additional burden on firms," says Plesko.
But Fred Murray, director of tax affairs at the Tax Executives Institute, says the form is somewhat redundant. "A lot of this information is already provided elsewhere," he says. And while TEI welcomes a move toward faster audits, Murray worries that the new rule will create a lot more work. "There is some angst that the new form will lead to new burdens on tax departments," he says.