Friday, July 9, 2004

The Treasury and IRS have moved to inject more transparency into the reporting of items differently for book and tax accounting purposess:

• Treasury and IRS Issue Revised Tax Form for Corporate Tax Returns (JS-1770)
• Treasury and IRS Issue Revised Schedule M-3 for Corporate Tax Returns (IR 2004-91)
• Draft Schedule M-3
• Draft Schedule M-3 Instructions
• Schedule M-3 Frequently Asked Questions
• Treasury and IRS Streamline Reporting of Significant Book-Tax Differences (JS-1769)
• Treasury, IRS Streamline Reporting of Significant Book-Tax Differences (IR 2004-92)
• Rev. Proc. 2004-45

Here’s the TaxGuru’s take on these releases:

Back when corporate accounting scandals were big news, I mentioned how much more useful it would be if shareholders and others interested in a company’s finances had access to copies of its income tax returns to see what is being reported to IRS. Under the very wide generally accepted accounting principles (GAAP), it’s very common for companies to tell IRS that they are losing their shirts, while at the same time telling the investing public that they are making money hand over fist. In fact, I requre a look at 1120s before giving my opinion on small corporations that are possible acquisition targets by my clients.

One of the underlying assumptions behind the Martha Stewart and other insider trading cases is the premise that every potential investor should have the exact same information at the exact same time and as much as possible in order to arrive at the best possible investment decisions. As I’ve mentioned before, such a goal is impossible to achieve; but releasing corporate tax returns would be a step in the right direction.

Similarly, knowing about differences between book accounting and what is reported on corporate income tax returns (1120) can tip off IRS to possibly over-aggressive tax savings strategies. These differences have normally been shown on Schedule M-1 on Page 4 of the 1120. However, IRS hasn’t been able to see the differences as clearly as they would like with the limited format of the current M-1; so they have come up with a new three page long Schedule M-3 to provide more detailed information on differences between book and tax income and expenses. This new schedule will only be required for corporations with more than $10 million in total assets and for tax years ending on or after December 31, 2004.