Adrift in a sea of uncertainty: tax accrual workpapers are work-product ... but showing them to your auditor may waive the protection.
Tax Executive › Vol. 61 Nbr. 1, January 2009
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Adrift in a sea of uncertainty: tax accrual workpapers are work-product ... but showing them to your auditor may waive the protection.
For more than 20 years, the Internal Revenue Service and corporate taxpayers have been embroiled in a battle over the disclosure of tax accrual workpapers. The prize sought by the IRS is a roadmap to the "soft spots" on the tax returns. Taxpayers have been fighting back with some success. In a recent case involving Textron, for example, both the trial court and the U.S. Court of Appeals for the First Circuit sustained the taxpayer's claim of work product protection. The First Circuit's recent opinion in Textron, however, asks as many questions as it answers. Most pointedly, the Textron decision begs the question: How do taxpayers best protect themselves against an IRS push for transparency?
First Out of the Gate: United States v. Textron, Inc. Like most large corporations, Textron, Inc.'s returns were regularly audited by the IRS, and in seven of the eight previous audit cycles, Textron had administratively contested the IRS examiner's proposed adjustments, with three of those disputes ending up in court. During its examination of Textron's 1998-2001 tax years, the IRS discovered that Textron had executed nine sale-leaseback transactions. The IRS contended that the transactions were substantially similar to the "sale in, lease out" or "SILO" transactions that it had "listed" as abusive tax-shelter transactions, (1) and in accordance with its audit policy, (2) the IRS requested all of Textron's "tax accrual workpapers." (3) One of the documents covered by the IRS's request was a list of items that, in the opinion of Textron's counsel, involved issues that might be challenged because the law was unclear, counsel percentage estimates of success in litigation, dollar amounts reserved per issue if Textron did not prevail, and backup workpapers including notes and memoranda written by in-house counsel. (4) As part of its internal audit process, Textron permitted i...See the full content of this document
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