IRS Making Big Business Nervous over Tax Accounting?

Thursday, August 20, 2009 , , , , 2 Comments

Personally I'd think the whole UBS thing would be causing more sleepless nights than this, but it is entirely reasonable to be concerned when you've got big business lawyers expressing opinion on financial statements. And you wonder why we're in such a mess? Hopefully this clears it up a tad.

Ruling in Tax-Auditing Case Puts Corporations on Edge

A little-publicized ruling in a recent case involving the Internal Revenue Service is causing lawyers for big companies some sleepless nights.

Last week, in a widely anticipated ruling, a federal appeals court in Boston said the IRS could gain access to documents created by a defense-contracting firm to determine whether the company's calculation of its tax liabilities would pass muster during a possible IRS audit. The decision in U.S. v. Textron Inc. reversed a January ruling by a smaller panel of judges on the same court.

To some lawyers who represent corporations, the decision signaled an attack by the courts on the "work-product doctrine," the legal rule that shields an individual or business from having to turn over documents created "in anticipation" of litigation. In its ruling, the First Circuit Court of Appeals said the documents at Textron weren't protected under the doctrine because they weren't prepared specifically "for use" in litigation.

The ruling "eviscerates the work-product doctrine," says Frederick Krebs, president of the Association of Corporate Counsel, an organization for in-house corporate lawyers. He says the ruling, which is binding in federal courts in the Northeast where the First Circuit is based but could influence other courts, will embolden the IRS -- as well as plaintiffs' lawyers who bring shareholder lawsuits -- to seek more such documents from public companies. "If the IRS gets access, [it] can immediately figure out where the client thinks it's weak, what it's willing to pay," he says. The IRS praised the ruling in a statement last week but declined further comment.

Wait for it, wait for it...

Thomas Sabatino, general counsel of Schering-Plough Corp., worries the court's decision could transcend the tax arena and make in-house lawyers wary of providing complete assessments of future legal trouble in a variety of areas, from product-liability litigation to patent disputes. "The fear factor for corporate counsel is that...the ruling would say any analysis done by lawyers to ensure the accuracy of financial statements can be exposed," he says. "That makes it much more difficult for lawyers to continue to protect their client."

Some tax experts say the concern is misplaced. Corporate lawyers are "trying to expand the work-product doctrine far beyond its original intent," says Dennis Ventry, a law professor at the University of California, Davis, whose analysis of the Textron case was cited by the court in its opinion. "The IRS operates with significant information deficiencies," he says, "and some companies bury things into a large tax return and try to obscure what they're doing."

The debate is playing out as the IRS in recent years has sought to hunt down illegal tax shelters. As part of that push, the agency increasingly is asking to review documents that show companies' analysis of how much they should set aside in reserves for additional tax payments, should the IRS identify questionable tax accounting. In most instances, the documents, known as tax-accrual papers, include the company lawyers' determination of the likelihood that it will win or lose future tax disputes with the IRS.

IRS, what are we trying to do here? Are we cracking down on tax shelters or are we just busting down conference room doors with guns blazing for the sake of tearing things up?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


What's happening is that the abuse of lawyer-client privilege and work-product privilege may be coming to an end.



You're right but my point was that it isn't coming to an end to usher in a new age of transparency, it's happening because the IRS is trying to squeeze out every single penny it can.

So cute to watch, isn't it? ;)