Schedule M-3: turning a lemon into lemonade.

Corporate taxpayers required to file the new Schedule M-3 can request answers to their questions about the new schedule using a web-based FAQ set up by the Internal Revenue Service in collaboration with stakeholder groups, including TEI.

Schedule M-3, "Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More," is filed by affected corporations in order to reconcile financial accounting income to taxable income. The IRS estimates that approximately 50,000 large and mid-size corporations are required to use the schedule. The M-3 data will be a major component of a revised return selection system for audits.

"Schedule M-3 represents a very significant change for taxpayers and the IRS. The new schedule will provide important tax accounting information that previously required extensive time to develop, and relied on an audit process that was burdensome to the taxpayer and resource-intensive for us," stated Deborah M. Nolan, Commissioner of the IRS Large and Mid-Size Business Division in an IRS press release. "We sought external input into the scope and design of the Schedule M-3, and we're continuing that collaboration to ensure understanding of the requirements of the new form."

In the spring of 2003, the IRS requested TEI's participation in a project to redesign the Schedule M-1 of Form 1120, which culminated in the development of Schedule M-3. TEI President Judith P. Zelisko observed that, "Although Schedule M-3 imposes a significant compliance and reporting burden on TEI member companies, the outcome was improved by the volunteer efforts of many TEI members." She added that, "One goal for the project was to afford taxpayers relief from the requirement to report all book-tax differences under the reportable transaction regulations."

Frequently Asked Questions Webpage

The Corporations section of the IRS internet site (www.irs.gov) features a Schedule M3 page that includes published material about the schedule, including Schedule M-3 Instructions, and the FAQs, which are updated weekly to add answers to additional questions submitted by taxpayers. The M-3 webpage is:

http://www.irs.gov/business/ corporations/article/ 0,,id= 119992,00.html

The FAQs are arranged and keyed to the line items and sections of the Schedule M-3 Instructions.

Stakeholder groups working with the IRS to provide the Schedule M-3 FAQ service include:

* Tax Executives Institute (TEI)

* American Institute of Certified Public Accountants (AICPA)

* American Taxation Association (ATA)

* Association for Computers and Taxation (ACT)

* Manufacturer's Alliance (MAPI)

* American Bar Association 

Taxpayers may submit questions using to the stakeholder groups, which will forward them to the IRS. In addition to consolidating questions for a quicker, higher-priority response by the IRS, submitting the questions through TEI or another group affords anonymity to taxpayers. Questions about Schedule M-3 can be submitted to TEI at [e-mail]. TEI will strip the questions of taxpayer-specific information before forwarding the questions to the IRS. Responses will be developed by the IRS and posted to the FAQ webpages. Taxpayers should check the FAQ frequently to determine weather their question has been answered.

Additional M-3 Schedules and 2005 Modifications

During the "Bonus Sessions" offered by the IRS Large and Mid-Size Business Division at TEI's Midyear Conference, Robert D. Adams, Senior Industry Advisor for the Heavy Manufacturing & Transportation Industry, provided an update to members on the IRS's use of the schedule as well as anticipated changes to the form. Beginning in 2005, he said, the IRS will require taxpayers that are filing their second Schedule M-3 to complete columns (a) and (d) of Parts II and III of the schedule. He explained that more than half of the return selection filters depend on taxpayers' completing column (a).

The IRS is also working on several new variations of the schedule, including versions that will be more closely tailored to the reporting requirements of life and property and casualty insurance companies. For the 2005 Schedule M-3, the IRS expects to add a new line to Schedule M-3 to take account of the section 199 manufacturing deduction and another line for intercompany transfer pricing adjustments. Finally, he said, the IRS expects to clarify the 2005 schedule based on feedback received from taxpayers through its FAQ project.