SUMMER 2019 TODAY’S GENER AL COUNSEL
What General Counsel Should Ask Tax Directors By Kathleen Pakenham aggressive tax positions. Here you need to probe into which positions are reserved, how the amounts were determined, and whether the reserves are expected to be used or released. This is particularly important for public companies since tax auditors often identify issues to examine based on 10-K reserves.
ince tax departments report up through the finance rather than legal function in most companies, it is easy for chief legal officers to be disconnected from one of the most legally complex and risky parts of an enterprise. Couple that with the fact that most tax directors are accountants, not lawyers, and you have the all-too-common situation in which the chief legal officer is unaware of tax disputes until it may be too late. This can be avoided, however, if you know the right questions to ask and understand where in-house counsel can be most helpful to the tax department. But asking the right questions sometimes requires translation from accountant-speak to lawyer-speak. Here are some starting points: What You Should Ask: Which tax years
are subject to adjustment by the IRS? What You May Hear: “We are closed through 2009.” Translation: Tax returns from 2010 through the last filed return are subject to adjustment. The IRS usually has three
years from the time a tax return is filed to make any adjustments. During an audit, however, the IRS regularly will ask for extensions of time to complete a cycle. Many tax directors are unaware that they have the right to refuse to extend the statute or that they can limit or condition a statute extension. Because the tax audit function may be delegated to a more junior person within the tax department, audits can needlessly extend for multiple years, increasing the likelihood of an adverse adjustment and leaving reserves on the books longer than necessary. What You Should Ask: What are the soft spots on the return? What You May Hear: “We are fully reserved.” Translation: The tax department has identified what it believes are positions most likely to be adjusted and booked as an accounting reserve, based on its judgment as to the most likely outcome. In reality, this tells you very little about the company’s cash tax exposure or whether the tax department is taking
What You Should Ask: Where are we under audit? What You May Hear: “United States, Canada and France.” Translation: No surprise, but further digging may be warranted. Are the same years under audit? Is there a risk that the countries may take inconsistent positions? Has the tax department taken all appropriate steps to keep the statute of limitations on refunds open in all countries affected by an adverse change? For example, if an intercompany transaction between the United States and Germany is being audited in one jurisdiction, it is important to keep the statute open (or make other filings) in the other country to preserve any claim for tax relief. What You Should Ask: Who is advising us on the X issue? What You May Hear: “Big 4.” Translation: Here’s where things may get tricky. Tax departments usually are staffed with accountants, most of whom trained in and have deep relationships with accounting firms. As a result, there is a natural affinity towards dealing with accountants as advisors. In our experience, an accounting firm may not be the best choice to objectively advise the company on tax litigation risk, particularly where the accounting firm advised on the underlying tax position or prepared the tax return. In addition, IRS audits can be mini-litigations (or not so mini) with