TEI opposes public disclosure of corporate tax returns.
In connection with the Committee on Finance's June 13 hearing on several "hot button" issues including "disclosure of corporate returns," I write to express Tax Executives Institute's opposition to public disclosure of corporate tax returns. In a background release dated June 9, the Committee stated that the June 13 hearing will include testimony by a witness on "how public disclosure of certain corporate tax return information would improve transparency and enhance both investor protection and tax compliance, without unduly harming taxpayer privacy concerns."
Protecting taxpayer confidentiality lies at the core of America's tax system, and Tax Executives Institute urges the Committee to preserve the confidentiality of tax returns and return-related information. Specifically, the Committee should proceed only after receiving testimony from a cross-section of witnesses and should resist unsupported assertions that wholesale or even partial public disclosure of tax return information will enhance tax compliance. Stated simply, no compelling case has been made for reversing the carefully balanced privacy protections that have undergirded the tax system for more than 30 years.
Tax Executives Institute is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the costs and burdens of administration and compliance to the benefit of taxpayers and government alike. TEI's 6,000 members represent 2,800 of the leading companies in the United States, Canada, Europe, and Asia. The Institute is committed to maintaining a system that works--one that builds upon the principle of voluntary compliance and is consistent with sound tax policy, one that taxpayers can comply with, and one in which the Internal Revenue Service can effectively perform its audit function without unduly burdening taxpayers.
Proposals to disclose all or part of the information on corporate tax returns are not new. The IRS Restructuring and Reform Act of 1998 instructed the Joint Committee on Taxation and the U.S. Department of the Treasury to prepare studies on the confidentiality of tax returns and tax return information. (1) Four years ago, Chairman Grassley asked both the Department of the Treasury and the Securities and Exchange Commission for their views on the topic and in remarks to the National Press Club this spring, IRS Commissioner Everson said:
[I]t makes sense to discuss whether corporate tax returns should be public. There are important public policy arguments to be made in favor of maintaining the privacy of corporate returns. Nevertheless, making corporate tax returns or a portion thereof public, would likely improve compliance.
SEC Chairman Cox has subsequently made similar comments.
Although it is wholly appropriate for Congress to periodically assess whether the tax system's core values --including the sacrosanct nature of taxpayer information--should be revised, refined, or even rejected, Tax Executives Institute cautions against proceeding in haste, based on unsupported assertions and inflammatory rhetoric. We are convinced that a careful weighing of the country's interests in preserving taxpayer confidentiality against the presumed benefits flowing from abandoning those interests will result in the preservation of taxpayers' right to privacy.
That said, the Institute acknowledges that some greater intergovernmental sharing of tax return information may be justified. Specifically, in urging the Treasury and SEC to abandon the notion of publicly disclosing all or portions of corporate tax returns, we said that there may be merit in amending section 6103 of the Internal Revenue Code to permit the SEC to obtain tax return data directly from the IRS to aid in civil investigations. Like other section 6103 exceptions, a new carve out, if enacted, should be narrowly construed and include safeguards against disclosure by SEC staff. We continue to believe that today, but we remain unpersuaded that public disclosure of all or part of a company's confidential and proprietary information will significantly aid the IRS or the SEC in their respective enforcement activities or in curbing misleading financial reporting. Indeed, with respect to the IRS, we believe it could constitute at best a distraction and at most a substantial misallocation of agency resources as the IRS responded to "tips" prompted by disclosure of tax returns.
No Case Has Been Made to Support Public Tax Return Disclosure
Before 1977, tax returns were "public records" subject to disclosure pursuant to executive order. They were not, however, generally released. Following executive branch efforts to misuse the IRS during the Watergate scandals, Congress enacted present-law section 6103 to strengthen taxpayer privacy rights in 1976. Specifically, Congress mandated that tax returns and tax return related information be confidential and not subject to disclosure, except in 13 limited circumstances. In crafting the disclosure exceptions to the general rule of confidentiality, Congress sought "to balance the particular office or agency's need for the information involved with the citizen's right to privacy, as well as the impact of the disclosure upon the continuation of compliance with our country's voluntary tax assessment system." (2) The exceptions are aimed at promoting the administration of federal tax laws and assisting various branches and levels of government in carrying out their respective purposes. Most important, none of the congressionally mandated exceptions gives any member of the general public access, in whole or in part, to another taxpayer's information.
Privacy is a core American value, and inasmuch as tax returns contain a treasure trove of information about the activities of taxpayers--individuals and corporations--a decision to vitiate that privacy should not be lightly made. In TEI's view, the case for public disclosure of tax returns--either in terms of improving tax compliance or protecting the investing public--must be compelling and demonstrable before Congress acts. As important, the benefits of disclosure should substantially outweigh the associated costs to the affected business taxpayers and the risks of unanticipated consequences to those taxpayers, public markets, and the economy as a whole.
To date, no proponent of disclosure has moved beyond anecdote and supposition in claiming that a measurable compliance or enforcement benefit can be obtained through public disclosure of corporate tax returns. No proponent has quantified the effect public disclosure would have on the ability of IRS revenue agents to more timely and effectively examine corporate tax returns. No proponent has estimated the effect of public tax return disclosure on the continued viability of the self-assessment system of taxation. And no proponent has calculated--or seemingly even seriously considered--the costs to businesses disclosure of such information would have, especially in respect of a potential loss of competitive advantages.
The Adverse Consequences of Public Tax Return Disclosure Are Real, Significant, and Far Reaching
Public disclosure of corporate tax return information would make all the information in the return available to the world. As then-Treasury Secretary O'Neill warned in his August 2000 letter to Chairman Grassley, disclosure of corporate tax returns would subject taxpayers to "misinformed and inexpert analysis." We agree. IRS agents are not only under a statutory obligation to safeguard taxpayer information but are expressly trained both in the intricacies of the Internal Revenue Code and the evaluation of the complex transactions that are reported on corporate tax returns. In addition, they have access to a company's tax records (as well as to attorneys in the IRS Office of Chief Counsel) to help explain and document the derivation of the numbers on the taxpayer's returns. Without comparable training, experience, and access to other resources, members of the public could not understand most of the information in the return. Indeed, they would likely misunderstand and misconstrue it.
More important, TEI is concerned that the public disclosure of corporate tax returns would effectively represent the outsourcing of a core governmental function--the examination of tax returns--to the public or the media. At best, public disclosure would prompt well-meaning but uninformed members of the public to raise issues that would distract the IRS from doing its job and require the expenditure of significant corporate and government resources to address. At worst, public disclosure of tax returns would politicize the examination of corporate tax returns, enabling competitors, gadflies, or social activists (from either the left or the right) to misuse the information, not to ensure compliance, but to disrupt the corporation's activities and challenge (in the context of particular taxpayers) Congress's setting of the tax rules. In other words, if Congress were to mandate the public disclosure of tax returns, it would be ignoring one of the chief (and unassailable) lessons of Watergate: the compelling need to shield the IRS and taxpayers from the political use of tax return information.
Public disclosure of tax returns of publicly traded corporations would also reveal confidential and proprietary data not currently contained in consolidated financial statements, including revenue and expense information by legal entity, jurisdiction, and functional category (e.g., sales, dividends, cost of sales). Although much if not all of the information in a tax return would be confusing to the majority of investors, disclosure would clearly aid a company's competitors enormously in understanding the taxpayer's business practices. Where a company's competitors are not subject to U.S. taxing jurisdiction (and, hence, not subject to the same disclosure rules), the comparative disadvantage would be even more pronounced.
There Are No Proven Benefits to Public Tax Return Disclosure
The ability of IRS examining agents to better identify aggressive or potentially abusive transactions will not be enhanced by public disclosure of tax returns. With the enhanced return disclosure requirements for many transactions, including the Schedule M-3 (for reporting book and tax accounting differences), and the ability of IRS agents to obtain access to all the supporting tax-return documentation, there is little more that agents can possibly need to examine tax returns. Thus, having the tax return publicly available will not increase the efficacy of risk-focused examinations.
Financial Information Disclosure, Not Tax Return Publication, Will Enhance Transparency and Also Preserves Tax Return Confidentiality
The Sarbanes-Oxley Act of 2002 was enacted to enhance the reliability of publicly reported financial information and to assure investors and the capital markets that companies have verifiable systems of internal controls to ensure the comprehensiveness, accuracy, and fairness of the reported data. A principle underlying Sarbanes-Oxley is that transparency in a company's reporting and verification process will aid in the clear presentation of accurate and complete financial information.
Because financial and tax reporting have vastly different objectives, it proves too much to conclude that the public disclosure of corporate tax returns is an appropriate extension of Sarbanes-Oxley. Financial accounting is designed to provide a fair assessment of a firm's financial condition, whereas tax accounting is designed to produce a legally verifiable result. "Financial accounting, in short, is hospitable to estimates, probabilities, and reasonable certainties, whereas the tax law ... can give no quarter to uncertainty." (3) Releasing tax returns as an aid in interpreting financial statements misapprehends the nature and policy objectives (and differences) of both tax and financial accounting.
If greater transparency in respect of public reporting of tax liabilities is desirable as a matter of public policy, a better approach would be to identify those pieces of tax-related information that would provide investors and markets a better understanding of the tax position of public companies and then make changes in the reporting of SEC information.
Let there be no misunderstanding: Tax Executives Institute fully supports the efforts of the Internal Revenue Service to enhance tax compliance. We oppose, however, any effort to diminish the confidentiality of tax return and return-related information under the guise of enhancing compliance because the case for public disclosure of tax returns as a means to enhance tax compliance has not been made. TEI urges the Committee to continue to protect the confidentiality of tax return and return-related information and we look forward to working collaboratively with the Committee to preserve those protections while enhancing taxpayer compliance. Tax Executives Institute appreciates the opportunity to present its views on protecting the confidentiality of corporate tax returns. Any questions about the Institute's views should be directed to either Timothy J. McCormally, TEI's Executive Director, or Eli J. Dicker, the Institute's Chief Tax Counsel. Both individuals may be contacted at 202.638.5601, or email@example.com; firstname.lastname@example.org.
RELATED ARTICLE: Standards of conduct.
Since the Mission, Principle, and Purposes of TEI can be achieved only by the observance on the part of its members of the highest standards of professional conduct, the Board of Directors adopted the following:
Tax Executives Institute, Inc., recognizes the following as the standards of conduct for each member in administering tax affairs for which he or she is responsible:
* The member accepts taxes as the cost of civilization and accepts the laws imposing taxes as the mechanism for distributing that cost among businesses and individuals. The member will comply with those laws, whether or not agreeing with them.
* The member recognizes an obligation to minimize company tax liability, within the bounds of the law and to the extent consistent with policies or objectives of the company, having due regard for the interests of society in sound tax policy, and will advise and support action to obtain that objective, to the best of the member's ability.
* The member recognizes an obligation to make an affirmative contribution to the sound administration of tax laws, and to the adoption of sound tax legislation, by cooperation and consultation with the persons charged with those functions, having due regard for the interests of society, as well as the interest of the company and its employees.
* The member accepts each Government representative as a person devoted to fulfilling the obligation to collect revenue honorably in accordance with law. The member will deal with the representatives on that basis, and will take occasion with others to uphold this view of Government representatives. In case of any deviation of a representative from that standard, the member will present the pertinent facts to the authorities authorized to take action with respect to the deviation.
* The member will present the facts required in tax returns and all the facts pertinent to the resolution of questions at issue with representatives of the government imposing the tax.
* The member will employ assistants and outside representatives upon the basis of their technical competence, always having due regard for the highest standards of professional ethics.
* The member will at all times recognize a duty of professionalism and will not use TEI membership to solicit business or sell products to other members.
(1.) Staff of Joint Committee on Taxation , Study of Present-Law Taxpayer Confidentiality and Disclosure Provisions as Required by Section 3802 of the Internal Revenue Service Restructuring and Reform Act of 1998, Volumes I-III (JCS-1100), 106th Cong., 2d Sess. (January 28, 2000).
(2.) Staff of Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976 (H.R. 10612, 94th Cong., Public Law 94-455) (Comm. Print. 1976), 94th Cong., 2d Sess. 315 (1976).
(3.) Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 543 (1979).
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|Title Annotation:||Tax Executives Institute|
|Date:||May 1, 2006|
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