Of tax shelters, e-filing, and positioning TEI in a tax world of grays.

One of the challenges of working in a world of grays is determining when you should frame your position as "yes, but" or "no, but." For example, a number of years ago as Congress, the Treasury Department, and the Internal Revenue Service launched their attacks on BOSS transactions and other so-called tax shelters, TEI was faced with three choices:

* Deny that any misconduct was occurring--that is to say, when presented with a "black or white" choice, embrace an emotionally satisfying "white, no problem here" position to counter the government's "black, the tax world as we know it is coming to an end" approach.

* Acknowledge that while some problems may exist, they had been significantly exaggerated and, in any event, were not the result of wilful misconduct but rather of the government's failure to provide clear standards, and accordingly only grudgingly accept that some changes might be appropriate--that is to say, a "no, but" approach

* Acknowledge that some problems exist and therefore that palliative action was appropriate but caution that the government (and media) should not overact to any transgressions--that is to say, a "yes, but" approach.

A fourth option existed, too: To do nothing, but for a group like TEI it was a choice only in the same way that Thomas Hobson, a stable owner in England, gave his potential customers a choice--the horse by the door or no horse at all. To be relevant, you have to engage. TEI did.

It can be argued that there is little substantive difference between the "yes, but" and the "no, but" approaches--in each case, you're proposing changes to the government's "black is black" position. Experience teaches, however, that a "yes, but" approach may ultimately yield better results or, at least, a better public reaction. In other words, by acknowledging that something should be done, you stand a better chance of securing "a place at the table" and, at the end of the day, being viewed as playing a constructive role in the process.

The "no, but"/"yes, but" dilemma came to mind recently in respect of TEI's activities on corporate e-filing. Following the September 15 extended filing deadline for 2005 Forms 1120, TEI sent a survey to its members about their companies' experience with the IRS's e-filing mandate (more about the results below), and one member took the Institute to task, as follows:

   Things went great [for my company]. However, I am disappointed
   in the fact that TEI was so resistant to change. We need
   to use technology to our advantage and partner with the IRS
   in these large initiatives. I was embarrassed by the way TEI
   responded to this mandate. My impression was that TEI acted
   more like a spoiled child kicking and screaming. I wished I
   would have seen TEI working more as a partner with the IRS.

Wow. That's not exactly the type of feedback we wanted to receive, especially since TEI devoted significant resources to doing exactly what the writer said we should have done--partnering with the IRS to make corporate e-filing work. To be sure, the Institute expressed significant concern about the manner in which the IRS issued its corporate e-filing mandate (contrasting it with the collaborative approach taken with Schedule M-3). On more than one occasion, we urged the IRS to delay the implementation of mandatory e-filing. But from our initial contact with the IRS (even before the mandate was issued in January 2005), the Institute not only expressed a willingness to assist the IRS in implementing the mandate, it and a number of its members put their money where TEI's mouth was.

Specifically, several TEI members and their staffs--including R. Don Blaicher and Earl H. Efraimson of ExxonMobil Corporation; Frederick R. Holt of American Financial Group, Inc.; William J. Marx of General Motors Corporation; and Roni Robinson of Halliburton Corporation--joined the TEI-IRS Forms and Attachment Task Group and met with the IRS, either in person or via conference call, nearly a dozen times. The group went through every IRS form and attachment and provided real-world--and realistic--feedback on how to make the mandate work. (Our members on the "FAT-G" group" were aided by members of the IRS Administrative Affairs Committee and the Institute's legal staff.) The Institute also assumed a significant role in the IRS's communication strategy, regularly sending out messages to all members and serving as a honest broker in terms of whether certain software vendors were telling the IRS the same thing they were telling their customers.

I sincerely believe that TEI's contributions to the IRS's e-filing project made it possible for the mandate to be implemented as successfully as it was. Because TEI adopted, in effect, a "no, but" approach to the IRS's mandate ("We think this is an ill-timed, rushed idea, especially on the heels of section 404 of Sarbanes-Oxley, but we will work with you to make it work"), however, the Institute was painted as "resistant to change," not only by some officials in the IRS, but by some of our own members. One can bemoan this characterization as "unfair" or "imbalanced"--especially when it emanates from people who are aware of the level and quality of TEI's involvement--but the real lesson is to remain mindful of not just whether, but how, you engage. Stated differently, in sound-bite driven Washington, attention must be paid to how issues and positions are framed.

Although the results of TEI's survey on its members' e-filing experience would likely not qualify as "statistically" significant, the survey contains much useful, and positive, information. The first question, answered by 164 members, asked for a rating of the company's experience with e-filing the corporate return, and yielded the following results:

Everything went smoothly; we met
our internal deadline                                 11.6%

We had some glitches, but were able
to work them out fairly quickly                       57.9%

We experienced significantly delays in working
out the glitches, but were eventually able to e-file  28.7%

We were unable to successfully e-file the return       1.8%

Significantly, for 50.3 percent of respondents, the "glitches" included their return being rejected at least once. (Six percent had their returns rejected more than six times before they were accepted.) The problems prompted 42.9 percent of the respondents to call the IRS help desk for assistance, and the overwhelming majority rated their experience as either good (47.1%) or satisfactory (44.3%).

The survey also asked about the companies' experience with their software vendor. The array of responses was, as follows:

Good            44.4%
Satisfactory    38.9%
Unsatisfactory  13.6%
Terrible         3.1%

The survey results are consistent (or at least not inconsistent) with the IRS's own reports that 12,500 companies successfully e-filed their returns. It would be a mistake, however, to assume that the process was perfect. It similarly would be a mistake to think that the process would have gone as well as it did without the Institute's input--and the IRS's receptivity to making changes along the way. For example, TEI successfully argued that taxpayers should be permitted to file Forms 5471 and other international forms as PDF attachments rather than in XML format. Had the IRS not acceded to TEI's suggestion, it is doubtful that the e-filing success rate would have been as high as it was.

Finally, it would be a mistake to conclude that just because the IRS's system did not "crash and burn," the decision to implement the mandate when it did and how it did was necessarily correct. Thus, there remains a significant question whether the benefits accruing to the IRS (and, down the road, to taxpayers themselves) from e-filing justified the "you will do it and do it now" approach taken with corporate e-filing. That this question remains valid, even after this year's "success," is underscored by several postings on TEI's website indicating that many IRS audit teams are requesting paper copies of returns.

All that said, TEI remains engaged with the IRS on the corporate e-filing issue, and remains encouraged by the recption given our recommendations. Indeed we have already held meetings about how to make next year's e-filing season easier and more successful.

Timothy McCormally

Executive Director