VideoWhen Mark Everson took office in 2003 as commissioner of the Internal Revenue Service, he promised that collecting underpaid corporate taxes would be a top priority, and backed it up by increasing the number of large corporate audits. Results were quickly realized, with additional recommended taxes doubling in fiscal 2005 compared with the previous year (see "Crackdown," January 2006). But now Syracuse University's Transactional Records Access Clearinghouse (TRAC) suggests the effort may have run out of steam.
TRAC researchers found that "IRS revenue agents are now spending substantially more of their time on corporate audits that produce no revenue for the government than they did in the recent past." They determined that, from fiscal 2005 to fiscal 2006, there was a "40 percent increase in the number of corporate audit hours that bore no fruit."
For the nation's largest corporations — those with assets of $250 million or more — additional tax liabilities as a result of audits fell 15 percent in fiscal 2006. Whereas $30.1 billion in additional taxes was sought by IRS audit agents in 2005, only $25.5 billion was claimed in 2006, a 15 percent decline.
The TRAC findings, however, do not impress the IRS. "We don't question TRAC's numbers," says spokesman Bruce Friedland. "We just think that they take a narrow view. Yes, the number of returns examined did dip from 2005 to 2006, but it didn't dip a lot. And in the broader context, it's a tremendous increase from 2003." In 2003, the number of large-corporation returns examined stood at 7,125. Two years later, the figure had reached 10,829 and eased back slightly in 2006 to 10,591.
But what if TRAC's numbers indicate not a waste of IRS time but an increase in corporate compliance? That's the possibility raised by Timothy J. McCormally, executive director of the Tax Executives Institute, a Washington, D.C.-based association of 6,800 tax specialists. McCormally notes that over the past few years the IRS has taken many steps to encourage accurate reporting of income, such as the adoption of new forms and various dispute-resolution tools.
"All these things led companies to voluntarily report income as taxable or not report income as nontaxable — things that previously might not have been reported," he says. "For corporate tax executives to read a report that says the IRS is leaving money on the table doesn't comport with reality — or at least their reality." — Art Detman
J-SOX Nation
This past April, Japanese pitching sensation Daisuke Matsuzaka wowed Red Sox Nation with his "gyroball." From now until next April, Dave Sackett expects to be equally mesmerized by Japan's version of the corporate curveball.
The corporate controller of Ulvac Technologies is charged with implementing J-SOX — the Japanese edition of the Sarbanes-Oxley Act (sometimes abbreviated as SOX). The process is a "huge deal" at the Methuen, Mass.-based subsidiary of Ulvac Inc. of Japan because the private firm (the parent is public) has never thought much about documenting internal controls or formalizing its audit trail. "Our reporting has been kind of loose in the past, but now we need to document everything," Sackett says.
Sound familiar? Following the lead of the U.S. standard setters, Japan passed a slightly less onerous version of Sarbox in June 2006 in response to its own corporate-accounting scandals. Now, working with auditors from Oishi & Co. of California, Sackett is instituting procedures such as linking employee hours to products by work order, creating a signature-authorization document for expenses, and installing a J-SOX-compliant ERP system.
While Sackett has never implemented Sarbox regulations before, "I followed them closely, because I knew we'd be mimicking the internal controls and checklists," he says. Natasha Nelson, chief ethics and compliance officer at Daiichi Sankyo Inc. in Parsippany, N.J., however, went one step further. She spent the past two years watching her fellow pharmaceutical companies implement Sarbox. With the support of company executives in Japan, she rolled out a strong whistle-blower program, hired staff with Sarbox experience, and even test audited a process. She learned not to overdocument, she says, and to attend lots and lots of seminars "to get the credentials we need to fully understand all the aspects of Sarbox."
Both companies are further along in preparing for J-SOX than most, says Paul Sachs, managing director of the Los Angeles office of Protiviti Inc. Too many U.S. subsidiaries of Japanese companies are waiting for directives from the head office rather than finding their own resources to help with J-SOX compliance, he observes. But all of them must be compliant by March 2009. And like his American counterparts, Sackett hopes there will be positives that come from the process. "It's like medicine," he says. "It tastes bad going down, but you know it's really good for you." — Cheryl Rosen
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