This is a newsletter from
J.D. Choi of
Tax Technologies, Inc. to tax
professionals whose interests are improving the tax management processes.
Table of Contents
- M-3
- Impact of Sarbanes-Oxley internal control requirements with regard to reportable transactions
- M-3 Executive Conference
- SFAS109 Accounting For Income Taxes Training
- TTI Show and Tell
In this issue of Tax Technology Newsletter, I examine the background on the issuance
of new Schedule M-3 for Form 1120 and the impact of Sarbanes-Oxley internal control
requirement with regard to reportable transactions. I also announce an executive
conference on M-3 compliance issue in this newsletter.
1. M-3
I have reported that Tax Technologies Inc. was invited to participate in a
discussion with various branches of Internal Revenue Service on March 3rd. The
discussion was focused on the issue of whether tax software vendors can produce the
new Schedule M-3 and the supporting schedules for the tax year ended
December 31, 2004. All software vendors agreed that it could be produced to meet
the December 31, 2004 deadline.
At that time, IRS has made it very clear that the new Schedule M-3 is here to
stay and it will be effective for the tax year ending on or after December 31, 2004.
In order to achieve the implementation target, IRS targeted to release the final
version of the form and instruction by June 30th, 2004.
Well, the IRS kept its word. The final draft was released on July 7, 2004 along
with draft instructions, frequently asked questions and revenue procedure 2004-45
announcing the issuance of M-3 and effective date among other issues.
Subsequent to the issuance of the final draft, the Internal Revenue Service
invited tax software vendors again for a follow up conference on July 15, 2004.
During the follow up conference, a number of practical implementation issues were
discussed. Although some of the issues remained open (such as partnership reporting on M-3),
none of the issues presented was a showstopper.
The final M-3 did not change much from the initial issuance in March. The
fundamental structure remained the same although the section reference has changed
and some of the lines changed. Thus the anticipated underlying mechanics remained the
same – reconciliation between global financial reporting and US tax reporting.
The basic structure provides reconciliation between global financial reporting and
US tax reporting by 1) inclusion and exclusion of entities (part 1), 2) reconciling book
tax difference by temporary and permanent difference so that income items and expense items
can be reconciled between financial reporting and tax reporting. This reporting structure
is very similar to that of current year tax provision workpaper structure.
This form provides significant information to the IRS. Treasury has been studying the
anomalies in balance sheet, income statement and interest expense between financial reporting
and tax reporting. The structure of M-3 allows such information to be provided to the IRS.
It also allows the IRS to measure the magnitude of the anomalies by each income and expense
item as specified in the form. IRS has made it clear that this information will be used to
assess the audit risk so it can better target companies.
The form also presents a comprehensive reconciliation point. If followed
correctly, it will have all supporting information provided on various forms to be
reconciled to M-3 and Form 1120. IRS has been enhancing small number of forms and
issued a few new forms in the last few years, including issuance of schedule N for
Form 1120, issuance of Forms 8858, 8886 and 8865, and modifications to Form 5471.
Perhaps more important for the taxpayers, yet less obvious, is the impact on
various state tax returns. There is already a task force by states to reflect the
issuance of M-3 to state tax returns and companies should anticipate that there
will be significant form changes for next couple of years.
I also anticipate that the foreign country reporting will change over time. This
was indicated already in May 2004, although less obvious, when the IRS announced
that it is forming a joint task force with Australia, Canada and UK. Initially, they
are targeting the financial products that are used in abusive tax transactions by
corporations and individuals. Under this task force, they will share expertise among
the tax administrators, enhance the compliance, and enforcement efforts through
coordinated and “real time” exchange of tax information among the member countries.
Obviously, if these countries are serious about the cooperation, they will have to
implement similar measure to Form 8886 reporting or M-3 reporting.
Based on the structure of M-3, it is obvious that companies will need to converge
the tax provision process with the compliance process in order to avoid duplicate
efforts. Although the existing M-1 reporting requires the close tie between the
provision and compliance, the mechanical difference in reporting made it less
important to converge the provision and compliance processes. Given that the M-3
reporting is very similar in its presentation to that of the provision, in some ways,
it will make it easier to perform accrual to return true-ups if the company synchronizes
the provision reporting and tax compliance reporting.
I see the issuance of M-3 as a significant event that will change the US tax
compliance significantly. Thus, I decided to host an M-3 Executive Conference on
August 17, 2004 at Harvard Club of New York. The conference detail is provided below.
If you need further details on the subject, please contact me at 201-387-9451.
2. Impact of Sarbanes-Oxley internal control requirements with regard to reportable
transactions Conference »
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The basic proposition of the Sarbanes-Oxley Act is simple: prove who did what,
when and how the internal control measure was exercised for that transaction.
I came across a number of articles and discussions on the impact of Sarbanes-Oxley
Act on tax department processes. Also, some of the companies are beginning to realize that
there should be internal control process in place for all reportable transactions, statements
and elections.
Conceptually, it is not difficult to see how the internal control requirement should work.
Mechanically, however, implementing a process and procedure in place is another matter. Furthermore,
implementing the process that can be integrated to compliance is much more difficult for many companies.
However, it can be integrated.
I believe the impact of Sarbanes-Oxley internal control requirement with regard to reportable
transactions is much more significant than that of many issues that are currently being focused on, such
as the internal control process for tax payments. Non-compliance (or lack of proof) for the reportable
transactions would produce much more devastating impact on corporate finance and its governance.
For example, under the Reg. Sec. 1.6011-4(6)(b), all transactions with book tax difference in excess
of $10 million must be separately reported under M-3 reporting and also for Form 8886 reporting. Also,
each transactions reported should be referenced between M-3 and Form 8886, thereby, requiring a coordination
between the filing of Form 8886 and M-3 while requiring internal control measure in place for each of the
transactions.
This is not necessarily a difficult matter conceptually: 1) have the transaction authorized by a person
with the authority, 2) produce the documentation supporting the authorization, 3) maintain the proof that
the transaction was properly authorized prior to the execution of the transaction, 4) execute the transaction
in accordance with the pre-authorized plan, 5) document execution of the plan and maintain proof of
execution, 6) reporting of such transaction was approved, and 7) the transaction was reported on its tax
return. Simple. Isn’t it?
Implementing the mechanical process and procedure along with the system to actually get it done is
another matter. In order to have the transaction documented for proper authorization, the system need to
allow global collaboration as many of the tax sensitive transactions can be initiated across many countries.
It should also have the ability to create a document and track it for authorization while producing Sarbanes-Oxley
compliance reports based on the activities of each of the participants. Implementing the system to effectuate
all that is not a simple matter for most companies.
Granted, not all companies will have large number of transactions in a given tax year. However, the
proof of compliance may be required a few years after the tax returns were filed. Thus, whether a transaction
is reported or not, determination as to whether the transaction should be reported needs to be documented
contemporaneously during the execution of each of the transactions to avoid unnecessary confusion and negative
consequences in the future.
TTI is in the process of developing the reportable transaction depository (using its existing document
depository technology and global data collection mechanism) that will be integrated to the compliance and
will produce the Sarbanes-Oxley compliance reports. If you are interested in participating in this project,
please let me know so we can reflect your requirements as part of our initial implementation.
3. M-3 Executive Conference »
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As mentioned in section 1 above, TTI will be hosting M-3 Executive Conference in New York
on August 17th at Harvard Club of New York.
Here are the details of the meeting:
Agenda for M-3 Executive Conference
| 9:00 – 9:30 |
Registration |
|
| 9:30 – 9:40 |
Introduction |
JD Choi (TTI) |
| 9:40 – 10:30 |
Comprehensive view
of M-3
- How it works
- How it relates to prior initiatives by the Treasury
o Form 1120 Schedule N
o Form 5471
o Form 8858
o Form 8865
o Form 8886
o Electronic filing
- How it will impact the compliance
o Global provision process converging
to compliance
o Implication on the state compliance
o Non-US local tax compliance |
JD Choi (TTI) |
| 10:30 - 11:20 |
Treasury Perspective
- Reasons for issuance of M-3
o Treasury focus
o Intended results
* Transparency
* Reduction of anomalies (balance
sheet, income, interest
expense)
* Specific targeting of audit |
Robert Adams (IRS -
LMSB,
M-3 Lead)
|
| 12:10 - 1:10 |
Convergence of
provision with compliance
- Tax technical analysis
- Process analysis
- Technology analysis |
Dan Silvey (TTI) |
| 2:10 - 2:30 |
European perspective
- Synchronization to European standard
o IAS, Statutory Account and Local Tax
Return standard
o Convergence of IAS and GAAP
- How should a corporation prepare for
o Simplification of global tax return
with single process |
Harm J. Oortwijn
(EA
Tax Services BV)
JD Choi |
| 3:20 - 3:40 |
Technology
Strategies |
Jeff Wenger (TTI) |
Cost for attending the conference is $500 per person. Seating is limited due to
space limitations. Based on our conferences in the past, it fills up rather quickly.
If we cannot accommodate the entire attendance request, we may host another session
in the near future. This course qualifies for CPE credit and 5 hours of CPE credit
will be provided to attendees on request.
TTI may be sending out a separate announcement for this conference. However, if
you are interested in attending this conference, please let me know by e-mail M3 conference
@taxtechnologies.com or call me at 201-387-9451.
I must also mention the lunch at Harvard Club is excellent.
4. SFAS109 Accounting For Income Taxes Training »
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TTI has been providing SFAS109 Accounting For Income Taxes training classes since early 2004.
These courses go beyond accounting theory and teach how to prepare the current and deferred tax components
of the global corporate tax provision. It also provides assistance with the new Section 404, Sarbanes Oxley
Internal Control Requirements and other advance topics in provision such as how to deal with hedging
transactions, FAS 133 issues, AMT issues, and NOL issues.
Course Level: Intermediate
No pre-requisites or advanced preparation required
Recommended CPE Credit: Up to 13 Hours
Cost: $1,195
If you are interested in attending any of our training session listed below,
please e-mail us to register or request more information. For more information
regarding administrative policies such as complaint and refund, please contact our
offices toll-free at 866-239-4884.
Jul 21 - 22, 2004 Los Angeles, CA
Aug 4 - 5, 2004 Boston, MA
Aug 18 - 19, 2004 Santa Clara, CA
Sep 16 - 17, 2004 New York, NY
Sep 22 - 23, 2004 Dallas, TX
Oct 20 - 21, 2004 Atlanta, GA
Nov 3 - 4, 2004 Miami, FL
Nov 10 - 11, 2004 Houston, TX
Dec 13 - 14, 2004 New York, NY
5. TTI Show and Tell »
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As some of you know, Tax Technologies, Inc. was nominated for E&Y’s Entrepreneur of
the Year Award and I was selected as a finalist for the award in the state of New Jersey.
More significantly, TTI was nominated by its client while all other companies were
nominated by its board of advisors, its bankers or its employees. This is the clear proof
that TTI is truly client-centric company and be recognized by its clients as such. It was
with my great pleasure that TTI was nominated by our client and selected as a finalist
for the award.
As a proof of our superior service and product, we have enjoyed 100 percent growth for
each of last four years with 100 percent client retention. In particular, all our clients
using the international tax software are pleased with the large scope of its calculations
and the ability to integrate data collection to compliance while providing Sarbanes-Oxley
compliance report. Given the high dissatisfaction rate for the tax software industry, it
is truly a remarkable record.
It is my promise to our clients that I will do my best to serve them with the best
service and product. I would also like to note my appreciation to our client who nominated
TTI for the award.
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Regards,
J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451
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