Why Corporate Taxpayers are more like Ostriches than Tigers?
I have spent the last few year presenting workshops to multinational corporations on Tax Risk Management.
In the process, as usual, I have met some interesting individuals and corporations. All, I might add, with similar problems.
The one question asked of me, which came up each time I presented, was: Why would you go back in time, scratch up old problems, and then determine the finite details of the risk exposure, and then approach the IRS to disclose. In addition, by pulling all the records and compiling a collection of the facts is surely dangerous, as any IRS official could then request that you submit that information to them, which would then make their task easier in unravelling the historical issues?
Thinking on my feet often takes me to the crisp and proper answer. This time it was no different. Firstly, the entire exercise must take place under the guidance of a “qualified attorney” to ensure the immediate presence of the attorney and client privilege. This will ensure that no IRS official can lay his or her hands on the information. The brief to the “qualified attorney” must be to review all the past historical facts pertaining to the risk area, to extract those facts that are relevant and then to determine the following, in the following order:
1. has the corporation done anything unlawful in terms of the tax legislation? In which case the appropriate “soft approach” must be made to SARS to mitigate any penalties.
2. if not, in preparation for any possible approach from SARS in the future, prepare witness statements, prepare the evidence, and obtain opinions on the core issues of the tax risk area in preparation for any SARS approach. This will include a determination whether or not proper disclosure was made in the year of assessment, or in response to any subsequent enquiry from the IRS. That’s all!
Would there be any merit in approaching IRS in the second scenario? The purpose could be to negotiate a settlement on the basis that if $100 was potentially due, without going through the courts to determine the principles, and because the taxpayer has decided to “self-disclosure” in the interests of good corporate governance and certainty, the IRS may agree to accept R10.
In my view, the IRS as the collection agency for the Federal government of taxes, could not logically justify settling a taxpayer’s risk at R10, in my example, simply because the taxpayer has been forthright. The IRS must collect what is due. Either they take the view that the tax is due or not. If it is due, they are duty bound to collect it. When is it appropriate and inappropriate for the IRS to settle?
Inappropriate to settle:
1. Intentional tax evasion or fraud.
2. Contrary to law or practice, without exceptional circumstances.
3. In the public interest to have judicial clarification and this case is appropriate.
4. Pursuit of the matter will ensure tax law compliance.
5. The Commissioner is of the opinion that the non-compliance is of a serious nature.
Appropriate to settle:
1.In the interests of good management of the tax system and overall fairness, and the best use of the Commissioner's resources, especially where the law is uncertain.
2.Cost of litigation in comparison to the possible benefits (prospects and success, prospects of collection, costs associated with collection).
3.Problematic due to complex factual, quantum issues or evidentiary difficulties.
4.A group of participants in a tax avoidance arrangement that is being unwound.
5.Settlement will promote compliance in a cost-effective way.
The guidelines are clear. If the taxpayer is able to clearly bring its case within the “appropriate” guidelines, the $10 settlement route may work. If not, the evidence with opinions may best be shelved in preparation for that rainy day. Beyond all this, the value of the Tax Risk Management strategy will help the management of the corporation to understand tax holisticly, and avoid the severe implications for the business in the future.
The end to the ostrich mentality, and the re-emergence of the Tiger.