The Tax Times: Are U.S. Firms Playing the Tax Audit Lottery?

Friday, December 19, 2014

Are U.S. Firms Playing the Tax Audit Lottery?

According to the WSJ they are!

Uncertain tax positions, recorded as an obscure liability entry on corporations’ balance sheet and securities filings, reflect tax breaks that push the envelope and are therefore uncertain to be sustained upon an audit by IRS (or other taxing authorities).

Buried deep in American corporations’ securities filings is an indicator of how aggressively they are working to shield their income from the Internal Revenue Service and other tax authorities.

The obscure entry,under the heading “Uncertain Tax Positions” or “Unrecognized Tax Benefits,” is where companies account for tax breaks that push the envelope and they are adding up:

Exxon Mobil Corp. reported that it had $7.8 billion of these uncertain tax positions outstanding as of Dec. 31, including $1.5 billion from 2013 alone.
Pfizer Inc. reported $6.1 billion, including $1.2 billion from 2013.
Google Inc. reported $3.1 billion at the end of September, up from $2.6 billion at the end of 2013.

All told, companies in the S&P 500 have amassed $188 Billion in unrecognized tax benefits by the end of their 2013 fiscal years; $21 billion of which was related to that year’s taxes, according a Wall Street Journal analysis of figures from Calcbench Inc., a financial data provider.

The companies have added between $19 billion and $22 billion of new uncertain tax positions each year since 2010.

Bets on those breaks or credits pay off if a company can prevail in court, if tax authorities don’t challenge the claims or if the statute of limitations expires, typically after three years for U.S. federal taxes. Even where companies do get audited, typically they get at least some of what they claim and there is a good chance that they can settled these issues for less than the amount they have in the reserve.

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