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Business forum: Want to play hide-and-seek with IRS?
Saturday, February 20, 2010

Hiding clever little accounting tricks deep inside corporate tax returns can save companies big sums, as long as no tax agent finds the golden nuggets.

It's a game of hide-and-seek that taxpayers take for granted. If a creative interpretation offers a tiny space for wriggling through a rule, squirm away. Concoct an arguable defense for paying the lighter tax the interpretation allows, and hope you never have to argue it.

If some poor agent of the Internal Revenue Service can dig through thousands of corporate tax return pages to find those questionable deductions and figures the potential payoff makes it worthwhile to challenge them, fine.

That is about to change if a rule proposed by the IRS sticks. The IRS has the radical idea that companies should point government snoops to every dubious tax break they claim. The rule would force businesses to list on their returns every "uncertain tax position" they are taking and say how much it would cost the company if the IRS challenged the claim.

It would force the companies to hand over maps to hidden treasures and state the value of the gold within the chest. That way, they would be telling the government whether it is worth the effort to open up the lid.

The rule is probably constitutional, Fifth Amendment right against self-incrimination notwithstanding. But it sure sounds un-American. Or, at least un-sportsmanlike.

What is the point of hiring all those tax lawyers if not to find little hiding places for big money? And what is the point of the little hiding places if you then must erect a big, flashing sign adorned with huge dollar signs pointing the IRS to them?

There are those who claim that paying taxes isn't a game. The Second U.S. Circuit Court of Appeals in Boston said so last August when it ordered Textron Inc. to turn over tax documents previously considered protected by attorney-client privilege.

As for the new rule, IRS Commissioner Doug Shulman says all the agency wants to do is collect taxes with "certainty, consistency and efficiency." Mr. Shulman has employed a word meant to convey legitimacy, openness and democracy.

He called it "a major step towards transparency."

As a journalist, I think of transparency as a good thing, especially when I want it from the government. As a citizen, I don't think the government should get so much of it from me. Not that I'm some sort of tax cheat, mind you. I don't even take questionable tax positions. In fact, as a tax-and-spend advocate, I hand over all I can to the U.S. Treasury.

I'm all for everyone paying all their taxes and for the IRS collecting them fairly and efficiently. Tens of billions of dollars in business taxes go uncollected every year, which adds to the tax burden of those who pay every dime they owe. (Like me.) So why does it seem like the IRS would be somehow cheating if it forced businesses to flush their dubious tax breaks out into the open?

Many of us think of complex tax collection as a hide-and-seek game. It's because the game is adversarial. A whole industry of lawyers, accountants and advisers lives on that assumption.

Ann Woolner is a Bloomberg News columnist.
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First published on February 20, 2010 at 12:00 am