The Supreme Court's decision last week to let stand a lower court ruling that the Internal Revenue Service has the authority to demand to see a company's tax work papers has increased concerns that the IRS will become more aggressive about requesting such documents.
The case involved an IRS request that Textron, the Providence, R.I.-based aerospace and defense supplier, give the agency access to papers, including a tax reserve summary spreadsheet, that related to lease-back deals and had been prepared by the company's in-house counsel. The First Circuit Court of Appeals ruled last year that the IRS should have access, triggering Textron's appeal to the Supreme Court.
The Textron decision isn't the only factor indicating increased interest in such information on the part of the IRS. The agency announced in January that it wants companies to begin providing it with a list of their uncertain tax positions, including the tax years involved and the amount of federal income tax the company would owe if the position were disallowed.
Jeffrey Frishman, national managing principal of tax practice policy and quality at Grant Thornton, expects the Textron decision won't necessarily increase document requests from the IRS. "The service's view generally is that there isn't much privilege in tax matters," he notes. "That's an underlying theme here."
It's too soon to understand the impact the Textron decision may have on corporate practices, Frishman says. "Does Textron potentially lead to a change in the manner of communication and disclosure between the company and its advisers to the potential detriment of the investor?" he says. "If there is risk related to establishing what some courts may look at as a dual-purpose document, is the company going to seek a meaningfully different way to get a tax risk analysis? What will that look like, and are auditors going to be satisfied with the nature of the documentation provided in order to deliver an unqualified opinion?"
Meanwhile, the public comment period on the IRS's proposed regulation regarding disclosure of uncertain tax positions ended June 1. Frishman notes that the IRS has said it plans to have those regulations in place for the 2010 tax filing season "for certain corporate tax filers."