Challenges of Transparency in Corporate Tax Departments, The

CPA Journal, The, Oct 2007 by Cowan, Mark J, English, Tom

Consolidated Impact of AS3, SAS 103, and RN 48

To support recognition under FIN 48's "more likely than not" standard, a company must accumulate evidence to support its tax positions. FIN 48 (para. 5) indicates that the amount and type of evidence required are matters of judgment based on the particular facts and circumstances of the position. FIN 48 (para. B34) makes it clear that external legal tax opinions can serve as evidence that the more-likely-than not standard has been met, but such opinions are not necessarily required. In any case, evidence of some kind must be gathered and documented in order to conform to FIN 48 and SFAS 109. Presumably, this may take the form of legal memos prepared by a company's tax department analyzing the facts and applicable tax law of various tax positions.

External auditors are likely to demand a substantial amount of evidence to support a company's FIN 48 analysis. First, there will be uncertainty regarding how much evidence is required, given that FlN 48 allows for judgment in this area. Auditors will likely err on the side of requesting too much, rather than too little, support. second, an auditor's exposure has changed under FIN 48. Previously, when tax uncertainties were governed by SFAS 5, the auditor opined on a negative assertion: that the company did not have any unreserved tax exposures where it was probable additional tax would be due. Under FIN 48, the auditor is opining on a positive assertion: that the tax positions reported on the financial statements are more likely than not to be sustained. The auditor is put at a greater risk under FiN 48 and will therefore have a strong interest in obtaining substantial evidence to support the client's assertion.

Once auditors have obtained the evidence, they must review it and, under the PCAOB and ASB standards previously discussed, document their review of this evidence. This documentation must be detailed enough to allow an audit professional with no prior involvement in the audit to determine, upon review of the workpapers, what audit work was performed, and assess the outcome of such work. Given the complexities of FIN 48 and the rigor of the new PCAOB and ASB documentation standards, it is likely that auditors will want to retain substantial documentation regarding the tax provision, such as legal memoranda in support of a client's FIN 48 assertions.

In short, the confluence of AS3, SAS 103, and FIN 48 will result in tax accrual workpapers that are more detailed and informative than ever before. This poses two major challenges to corporate tax departments: 1) documenting the evidence the external auditors will demand in order to comply with FTN 48, and 2) assessing the risk that such documentation may be obtained by the IRS.

Improving Documentation

FIN 48 and the accompanying pressure on auditors to more fully document their work will put pressure on corporate tax departments to better assess, articulate, and document their tax positions. In this sense, FIN 48 adds to an already burdensome litany of new pressures on corporate tax departments.