Observations on Disclosure, Transparency and Taxpayer Compliance

Under the traditional model of U.S. federal income tax reporting and compliance, taxpayers report the results of their tax planning and operations on a net basis on their federal income tax returns. They provide relatively little or no information on a transaction-by-transaction basis. Taxpayers are obligated to maintain only such records as are necessary to support the amounts reported on their tax returns. The IRS is free to review those records on audit, subject to claims of privilege, and traditionally without recourse to the taxpayer's workpapers relating to accruals of tax liability for financial reporting purposes. The Treasury, IRS and Congress have become increasingly frustrated with this traditional model and have adopted a series of reforms to achieve more specific disclosure and greater transparency. This article provides an overview of key steps taken in the progression towards requiring greater transparency and more specific tax return disclosure. It also provides one practitioner's comments on the issues and choices facing the Treasury and IRS as they implement and administer the new disclosure regime in the context of pending legislation that would provide severe penalties and little flexibility in administering those penalties. Particular concerns include the interaction of these inflexible penalties for failure to disclose with the occasionally vague and uncertain definitions under the current regulations as to what transactions must be disclosed. Another concern discussed is the potentially adverse effect of the trend towards requiring disclosure of tax accrual workpapers on the quality of reported financial statements