TEI gives e-filing frosty reception: TEI discusses e-filing mandate, 2004 Act Guidance, and other key issues during Washington liaison meetings; files comments on Canada's Technical Tax Bill; and testifies at IRS Oversight Board hearing.

A mild and unseasonably warm start to January gave way to mid-month frigid weather in Washington, D.C., as corporate taxpayers came to grips with a chilling IRS "forecast"--a requirement that corporations with total assets of $50 million or more will be filing their Forms 1120 electronically beginning in 2006. While acknowledging the potential benefits of e-filling to the IRS, Tax Executives Institute expressed significant reservations about the mandate, in2 terms of both its practicality and cost and because the IRS's pronouncement (which took the form of immediately effective temporary regulations) was not preceded by consultations with taxpayers and taxpayer groups (as occurred, for example, with the new Schedule M-3).

TEI expressed its views in several forums, most notably in its annual liaison meetings with officials of both the IRS National Office and the Large and Mid-Size Business Division. Following the LMSB meeting on February 9, a group of members met separately with the IRS to discuss the practical implications of the e-filing mandate. These included TEI's concerns that, the assurances of software vendors notwithstanding, significant doubt existed whether the mandate could be successfully implemented within the time frame specified by the IRS.

Liaison Agendas

In addition to e-filing, TEI discussed other vital topics at its annual liaison meeting with IRS's Large and Mid-Size Business Division held on February 9. TEI and LMSB have met together every year since the division became operational in 1999. TEI's delegation to the liaison meeting was led by Judy Zelisko, Institute President. LMSB's delegation was chaired by LMSB Commissioner Deborah Nolan and Deputy Commissioner Bruce Ungar. The discussion covered topics such as "currency," the Compliance Assurance Process, Appeals, Schedule M-3, Circular 230, and the interaction among IRS, SEC, and FASB. TEI also took the opportunity afforded by the meeting to express its appreciation to the IRS and Treasury for their expeditious and creditable work in providing guidance on several provisions of the Jobs Creation Act of 2004.

The Institute's agenda for LMSB meeting is reprinted in this issue, beginning on page 72. Minutes of the meeting will be published in a future issue.

TEI also held a liaison meeting with IRS Commissioner Mark Everson and other IRS National Office officials, with many of the same topics being discussed.

Finally, TEI was scheduled to meet with the Treasury Department's Office of Tax Policy, but the last-minute scheduling of congressional hearings on the President's budget caused the meeting to be postponed. The agenda for the Treasury meeting, which will be rescheduled in the spring, is set forth in this issue, beginning on page 68.

For more on the liaison meetings, see this issue's President's Corner.

IRS Oversight Board Testimony

On February 2, TEI testified before the IRS Oversight Board on the role of corporate tax departments in tax administration and the need for streamlining tax administration. The Board, which oversees the IRS's administration, management, and direction, has invited TEI's testimony every year since its inception (as part of the restructuring of the tax agency.) The Institute's testimony was presented by TEI Executive Director Timothy McCormally.

In its testimony, TEI emphasized the role that corporate tax departments have in protecting the integrity of the tax system and ensuring that tax professionals adhere to professional standards and follow the law. He noted that Circular 230 now provides certain "best practices" or "aspirational standards" for rendering tax advice, and affirmed the importance of such standards to professionalism in the tax field, noting TEI's own Standards of Conduct.

The Institute then turned to streamlining tax administration, and discussed the development of several audit techniques during the last few years developed by LMSB to achieve a reduction of audit cycle time and to improve audits and audit coverage. One such initiative is the Joint Audit Planning Process--a joint TEI-LMSB initiative--which helps allocate time and resources to the most important areas by delineating both the individual and the joint responsibilities of all participants.

TEI's written statement explained that several other innovative procedures have also sought to improve the examination process and promote currency. The Institute made special mention of the Compliance Assurance Process (CAP) program (which is currently being piloted), which employs real-time issue resolution, saying that TEI is pleased to have worked with LMSB in developing the program.

Turning to the e-filing mandate, Mr. McCormally confirmed that TEI is supportive of the goal of increasing the number of tax returns that are filed electronically, but suggested the IRS has not adequately demonstrated the urgency requiring immediately effective regulations or the benefits of e-filing to taxpayers. The Institute also challenged the assumption of uniformity and technological sophistication that seemingly undergirded its decision. The testimony also pointed out that the mandate came on the heels of other government IT mandates, including those flowing from the Sarbanes-Oxley Act and the 2004 tax law.

The Institute concluded its testimony by highlighting the ongoing need for tax simplification--an issue that TEI has brought before the Board in previous testimony. Pointing out that meaningful streamlining of tax administration can only occur through the simplification of the tax law, Mr. McCormally encouraged the Oversight Board to provide input to the President's Advisory Panel on Federal Tax Reform.

TEI's written testimony is reprinted in this issue, beginning on page 76.

Canadian Technical Bill

On December 6, 2004, TEI submitted comments to the Tax Legislation Division of Canada's Department of Finance on legislative proposals and draft income tax regulations relating to the treatment of foreign affiliates. The extensive comments were prepared by the Institute's Canadian Income Tax Committee, whose chair is David V. Daubaras of General Electric Canada.

The draft technical bill was released in February 2004 and affects numerous provisions of the Income Tax Act and Income Tax Regulations. TEI commended the Department for drafting a comprehensive bill to bring much needed clarity and certainty of tax treatment for taxpayers and Canada Revenue Agency alike. TEI's comments noted that a number of provisions go far beyond effecting technical amendments and address real or perceived policy issues. Although some of the changes are supportable, the comments said, many others are "overbroad, unnecessarily complex, and impose undue compliance burdens on taxpayers." The Institute encouraged the Department to consider extending its consultations on the legislation in order to find simpler solutions that would address the government's policy concerns.

TEI also urged the Department to expand the technical notes and elaborate on the underlying policy framework of many of the provisions. Given the complexity of the rules, more "real world" examples would serve to illustrate commonplace, but factually complex situations. The Institute's detailed comments highlight concerns about a number of substantive policy provisions and provide detailed comments on technical issues, including restrictive covenants, interests in trusts held on income account, Global Section 95 elections, the fresh-start rules, rollovers, the treatment of foreign exchange gains and losses on reorganizations involving foreign affiliates (including hedges of foreign affiliates), changes in the treatment of foreign affiliate loans under section 17, corporate reorganizations, and numerous definitions.

TEI's comments appear in this issue, beginning on page 78.

Toronto Harmonization 

In a letter dated December 14, TEI submitted comments to the Honorable Dalton McGuinty, Premier of Ontario, regarding harmonization of Ontario's corporate income tax collection system. The comments were prepared by the Toronto Chapter and encouraged the Ontario government to move forward on a proposal to work with the federal government toward establishing a single corporate income tax collection system.

The letter notes that adoption of a single corporate income tax collection system would be a positive first step in the elimination of redundant processes, increasing efficiency for the Canadian provincial and federal governments as well as corporate taxpayers. Ultimately, full harmonization of the income tax systems would produce significant cost savings for both levels of government and for Ontario businesses and also improve Ontario's business climate.

The Institute's letter is reprinted in this issue beginning on page 89.

TEI ADVOCACY AT A GLANCE

* Agenda for TEI-LMSB Liaison Meeting, page

* Agenda for TEI-Treasury Department Meeting, page 68.

* Comments on the Canadian Department of Finance's Legislative Proposals and Draft Income Tax Regulations Relating to the Treatment of Foreign Affiliates, page 78.

* Letter to the Premier of Ontario Regarding Harmonization of Ontario's Corporate Income Tax Collection System, page 89.

* Testimony before the IRS Oversight Board, page 76.