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Regulators, IRS mull stricter tax guidelines

/ Source: The Associated Press

Securities regulators and the IRS are exploring the idea of requiring companies to publicly release more tax information, the chairman of the Securities and Exchange Commission said on Monday.

SEC Chairman Christopher Cox said he discussed the subject over lunch recently with Mark Everson, commissioner of the Internal Revenue Service. Cox stressed that the idea is not a formal proposal. But if it’s enacted it would give investors a major new tool for evaluating the financial health of publicly traded companies.

Cox mentioned the possibility of requiring additional tax disclosures at the end of remarks at the annual meeting of the Society of American Business Editors and Writers.

He said he and Everson “recently had lunch to discuss in part whether or not side-by-side presentation of tax reporting and financial reporting would be beneficial for investors. And that topic is what I would call right now intellectual R&D,” or research and development.

“I don’t want to broadcast to all these journalists that we’re about to do something on that. But I want you to be aware that that conversation takes place,” he said. “The object has to be clarity, so we want to make sure that whatever we do in this respect adds clarity, and doesn’t just add a lot more facts and details that creates a problem.”

Corporate watchdogs have long viewed with suspicion the gap between what companies report to the SEC and the IRS. Companies are under pressure to maximize earnings they report to shareholders while minimizing earnings they report to the revenue service. Company financial reports include a line for tax expenses, but that’s not the same as the actual tax bill they paid, because it can include things such as reserves for future tax bills.

Taxpayer advocates worry about any move away from the historic privacy of tax returns, even for corporations.

“That would be one of the most radical departures in tax history,” said Pete Sepp, spokesman for the conservative National Taxpayers Union. He added, “It could start us down a very dangerous path.”

Tax-return information “is often regarded as among the most private in American society,” he said.

Everson floated the idea of making corporate tax returns public during a March 14 speech at the National Press Club. He said that while there are arguments in favor of keeping corporate returns private, “making corporate tax returns or a portion thereof public would likely improve compliance. I believe this idea merits debate.”

Edward D. Kleinbard, a partner at Cleary Gottlieb Steen & Hamilton who has written about the difference between financial reporting for taxes and Wall Street, said investors would benefit from a look at more corporate tax information, although he didn’t think a company’s entire tax return should be public.

“By having that kind of information, investors can come to their own conclusions,” he said. “It gives you the opportunity to see the company in stereo, because you have two different perspectives on this company.”

He said companies already fill out a one-page form for the IRS that explains the differences between the numbers reported to Wall Street and the IRS.

The full return, though, would overwhelm investors and give competitors too much information about a company, he said.

“Competitors would invest, frankly, the millions of dollars it would take to mine that data to learn a lot about their competitors. How much are my competitors spending on research? What kind of equipment are they buying? What is their structure for their investment in Portugal?”

Mihir A. Desai, an associate professor at Harvard who has tracked the gap between tax and financial reporting, said the gap didn’t exist for many years, and most of it could be explained by differences in rules for accounting for things such as how long it takes assets to lose their value. But the gap mushroomed in the late 1990s and has been as high as $200 billion.

“Managers got very good at exploiting the differences between book and tax reporting to show the capital markets results that (seemed to be) better than they really were,” he said.

He called Cox’s idea “a good first step toward restoring some sanity to these parallel universes that have developed.”