Following the Financial Crisis of 2008, there has been increasing legislative anxiety about the management of the tax function of multinational enterprises (MNE). The requirements of Sarbanes-Oxley (SOX) are well known by this time, as are the financial accounting consequences of uncertain tax positions. The Internal Revenue Service (IRS) is also reviewing UTP Schedule data to the greatest extent possible.
Taxation is one of the principal costs of all MNEs, which makes it an attractive candidate for expense minimization. Many of the famous scandals that gave rise to SOX originated in internal planning that produced dramatic book-tax differences. One of the many purposes of SOX was to provide appropriate controls to police overly cozy relationships between the parties to the tax and financial reporting functions, internal and external.
In addition, the motivation for employees to blow the whistle on perceived abuses in tax departments was heightened by the expansion of Section 7623. The Tax Relief and Health Care Act of 2006 made significant changes to the whistleblower program, including, in certain circumstances, paying nondiscretionary whistleblower awards and providing the Tax Court with jurisdiction to review determinations regarding those awards (Section 7623(b)(4)). The purpose of the 2006 legislation was to provide incentives for persons with knowledge of significant tax noncompliance to come forward and assist the IRS.
The legislation also required the establishment of a Whistleblower Office within the IRS, which administers the award program. Section 7623(b) generally requires the IRS to pay awards on amounts in dispute over $2 million if information provided by an individual results in the collection of tax, penalties, interest and other amounts. If the thresholds are met, and the whistleblower provides information that substantially contributes to a collection of tax, penalties and interest, the whistleblower must receive an award of at least 15 percent but not more than 30 percent of the collected proceeds resulting from administrative or judicial actions (including related actions) or from any settlement in response to an administrative or judicial action. There have been prominent recent instances of whistleblowers making claims relating to corporate planning strategies that are believed by the whistleblower to be inappropriate.
As the pressure on corporate tax departments expands to produce competitive effective tax rates, the need for fundamental U.S. international tax reform accelerates and the IRS continues to expand its international enforcement programs, it is prudent for the Board Audit Committee to include tax risk in the laundry list of financial risks that need to be policed. In the event that committee members are anxious about specific issues, it would be appropriate for the Board Audit Committee to undertake its own examination of the situation. When such examinations are undertaken, interesting issues can arise related to attorney–client privilege, as well as issues related to dealings with the financial auditor and the IRS, especially if the nature of the claims become public.
Among its responsibilities, the Board Audit Committee should include the broad range of tax matters on its agenda, including effective tax rate, uncertain tax positions, and defense of the rate and related planning strategies.