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Last year I wrote about how the IRS had created an audit program and trained its agents to better audit executive compensation.

This summer, the IRS agents are going back to class.

Subject: "FIN 48 - Uncertainty in Income Taxes"

This new topic is the result of the accounting rules recently issued by the Financial Accounting Standards Board (FASB) on calculation and disclosure of reserves in relation to uncertain income tax positions. This is simply an interpretation of FASB 109 Accounting for Income Taxes, effective for the fiscal year that began December 15, 2006. It affects all entities that follow U.S. GAAP and applies to all income tax positions governed by FASB 109. This includes S corporations and tax-exempt entities as well.

The IRS is well aware that all calendar year end public companies had to comply with FIN 48 by the time their first 10-Q was filed earlier this year. By now, the IRS has read many of the 10-Qs and has also gathered a general understanding of taxpayer concerns in relation to FIN 48.

That's why, in May 2007, the IRS issued guidance to its auditors through "FIN 48 Implications LMSB Field Examiner's Guide" (the "Guide") and updated its policy on Tax Accrual Workpapers by issuing a memorandum, also in May 2007. Further, it is holding a 6-hour mandatory CPE seminar for its auditors and is also developing leaders in FIN 48 to assist agents with future questions and concerns. Through the Guide, the IRS is providing its agents with a reference manual, which explains FIN 48 and how to read the tabular reconciliation requirement. In addition, it explains to IRS agents how to use it during examinations and provides answers to the "Top 10 most Frequently Asked Questions."

Through the memorandum, labeled "FIN 48 and Tax Accrual Workpaper Policy Update LMSB Commissioner," the IRS is announcing to all of us that it received a determination from counsel that FIN 48 workpapers are Tax Accrual Workpapers and are subject to IRS policy of restraint. The IRS is also letting us know that this is the current policy, and is subject to change.

The Guide starts by explaining why taxpayers may want to move quickly during an IRS audit and "...more tightly control the statute of limitations especially if there is a motivation to release the contingent tax liability into earnings..."

The Guide closes by discussing the longstanding IRS policy of not re-opening tax years that have been examined. The IRS is now updating that policy with the statement "... it is possible that re-openings will occur more frequently because of the potentially increased availability of information ..."

FIN 48 will change the IRS policies and procedures, as this first set of guidance clearly indicates. It will also change the auditor-taxpayer relationship.

In the "Top 10 Most Frequently Asked Questions" section, the first and most important question asked is "Are FIN 48 disclosures a roadmap for the IRS?" The discussion urges agents to make sure they read everything and anything relating to FIN 48 disclosure and use it for planning the audit and questioning the taxpayer.

One paragraph starts as follows: "Even with the lack of specificity, tax footnotes included in financial statements, including FIN 48 disclosures, should be carefully reviewed and analyzed as part of the audit planning process."

Another paragraph states: "Revenue agents should not be reluctant to pursue matters mentioned in FIN 48 disclosures, but should be mindful of our policy of restraint on Tax Accrual Workpapers..." The real conundrum for the IRS agent is how to accomplish the first part of the statement without jeopardizing the restraint policy. It's a balancing act for the agent for which the guide offers no help.

The IRS understands its agents have an advantage in today's environment due to FIN 48 disclosures that did not exist as of last year and will not shy away from it. As the guide states "...FIN 48 should give the Service a better view of a taxpayer's uncertain tax positions..." but cautions auditors that the disclosures aren't specific enough to allow a perfect view of the issues and amounts involved. It provides an example of a large multinational taxpayer that has a contingent tax liability listed as "tax credits" in its tax footnotes. Because tax credits may be U.S., foreign, or state tax credits, the disclosure may or may not have a U.S. tax impact. So, how would the agent obtain clarity as to which tax credit is the contingent liability for? It is obvious; the agent will ask questions and more questions and will not stop asking until the answer is provided. If the taxpayer refuses to answer, the agent will demand the FIN 48 workpapers. Balancing act is now complete.

Simply put, our interpretation of the answer to "Are FIN 48 disclosures a roadmap for the IRS?" is ... "Yes. Use it to bite... but not too hard."

In summary, through the guide and the memorandum, the IRS has put the business world on notice. Even though IRS is trying to be "politically correct," they are letting us know all agents will be trained on FIN 48, will learn to use it as a road map in planning and questioning, and if they do not find the jar of money and the audit year closes ... they can just open it.