Will Taxpayers Bare Their Souls?

It isn't every day that a taxpayer can make the Internal Revenue Service back off a position once it has dug in its heels, but that's what a Washington, D.C., publisher of financial information has succeeded in doing. Problem is, the publisher's victory may dampen companies' interest in advance pricing agreements (APAs).

The publisher, the Bureau of National Affairs (BNA), filed a lawsuit against the federal agency when it refused to make APAs information public. Before the lawsuit could come to a conclusion, the IRS agreed to make the documents public, with sensitive information removed from them.

Meanwhile, corporate taxpayers may get cold feet about providing sensitive information to the IRS through APAs. The APA program was created to make it easier for taxpayers to comply with federal laws governing the apportionment of income among several businesses owned or controlled by a single company. The program, which is voluntary, allows the IRS, other tax authorities, and the company to settle on an apportionment scheme before a product is sold, and removes the possibility that the IRS will challenge how a company apportions the income from a product after it has made it to market.

Before the APA program, when a dispute did erupt it usually resulted in costly litigation, says Timothy McCormally, general counsel for the Tax Executives Institute, a business association based in Washington, D.C.

Now companies fear the information in the APAs--even with sensitive data removed--will be used by competitors to gain a competitive advantage over them. "Taxpayers are a little nervous about this," he says. "They've bared their souls in these things, and now the IRS wants to make them public. They may prefer the risk of audit to the risk of disclosure."

The IRS believes redaction, or the removal of sensitive information from the 174 APAs on file with the agency, will adequately protect taxpayers. 'Redaction has been used to safeguard information in our private letter rulings for many years, and we intend to apply the same protections to the APA process," explains Richard Barrett, director of the APA program.

COPYRIGHT 1999 CFO Publishing Corp.
COPYRIGHT 2000 Gale Group