Study: Many Big Companies Omit Tax Disclosure

Nearly 72 companies did not provide the required "12-month look-forward" report in the 10-Ks they filed in the first quarter of this year.
David KatzJuly 21, 2008

Over 25 percent of 601 companies with revenues of more than $2 billion aren’t meeting the disclosure requirements for tax reserves required by the Financial Accounting Standards Board rule number 48, according to a study released Monday.

Nearly 72 companies–all of which filed 10-Ks in the first quarter of 2008–did not provide the required “12-month look-forward” discussion at all, according to the report by Seigel & Associates, LLC, a tax-reserve advisory firm founded by former Internal Revenue Service chief counsel Stuart E. Seigel. The firm considers the lapse “the greatest single area of non-compliance with FIN 48 disclosure requirements,” according to the report.

FIN 48 is a Financial Accounting Standards Board interpretation that tells companies how to account for uncertainty in tax positions. The measure, which went into effect for most companies with fiscal years beginning after December 15, 2006 requires that corporations disclose how much they have kept in reserve to cover the possibility that the IRS or state tax officials might disallow certain tax treatments.”

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Concerning the “look forward” provision, the interpretation requires companies with a reasonable possibility that the total amounts of their unrecognized tax benefits will “significantly increase or decrease within 12 months of the reporting date” to make certain disclosures. The are the nature of the uncertainty; the nature of the event that could occur in the next year that spur the change; and an estimate of the range of the possible change or a statement that an estimate of the range can’t be made.”

Of the 529 companies responding to the study that addressed the subject, 196 said that the anticipated change was not material; 76 said that they could not reasonably estimate the range; and 257 reported a specific amount, with 24 indicating zero and 68 giving a range rather than a finite number.

In the report, the firm stated that four primary matters concerning tax reserves interest shareholders and analysts: “how big are they, how have they changed from the prior year, how are they expected to change during the coming year, and what potential material issues may be lurking in the reserves. This makes the ’12-month look- forward’ a critical subject for companies to
report on and, thus far, is the disclosure area most in need of improvement.”

The report also found that as a result of the adoption of FIN 48, 280 of the companies responding boosted their tax reserves (the amount set aside by companies pending post-filing tax adjustments) by a total of $8.1 billion and 151 decreased their reserves by a total of $6.8 billion.

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