March 9, 2007

Ms. Deborah M. Nolan

Commissioner

Large and Mid-Size Business Division

Internal Revenue Service

801 Ninth Street, NW

Washington, DC  20001

Dear Ms. Nolan:

I am writing on behalf of the Committee on Taxation (“COT”) of Financial Executives International ("FEI") to express concern about a possible IRS decision to reconsider its policy of restraint in requesting access to tax accrual workpapers.  We do not believe FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), is a reason for the IRS to alter its policy of restraint in requesting access to tax accrual workpapers.  We strongly urge the IRS to maintain its policy of restraint with respect to tax accrual workpapers, including those underlying FIN 48 disclosures.

FEI is a professional association representing the interests of more than 15,000 CFOs, treasurers, controllers, tax directors, and other senior financial executives from over 8,000 major companies throughout the United States and Canada.  FEI represents both the providers and users of financial information.  The COT formulates tax policy for FEI in line with the views of the membership.  This letter represents only the views of the COT.

The existing IRS policy of requesting tax accrual workpapers only in unusual circumstances (except in audits involving "listed" tax shelter transactions) has been in place for more than two decades and encourages free dialogue between taxpayers and their audit firms.  The policy of restraint reflects an appropriate balance between the competing priorities of securities law and federal tax administration.  These competing priorities were recognized by the Supreme Court in United States v. Arthur Young & Co., 465 U.S. 805 (1984) over 20 years ago.  In its Arthur Young decision, the Supreme Court highlighted the IRS's promulgation of its policy of restraint as a factor in reaching its conclusion to permit access to the accountant’s tax accrual workpapers. 

Altering the policy of restraint so that the IRS would more regularly seek access to tax accrual workpapers, including documents underlying FIN 48 disclosures, is likely to have a chilling effect on communications between taxpayers and their auditors.  We believe it is in the best interests of the financial statement user community to encourage an open dialogue between financial statement issuers and their audit firms.

Moreover, the IRS has adopted numerous other information gathering tools that it can utilize in lieu of relying on broad access to tax accrual workpapers.  For example, the IRS created the Schedule M-3 to provide greater transparency with respect to book-tax differences and to allow the IRS to easily identify issues that merit closer scrutiny.  Similarly, the reportable transaction disclosure rules provide the IRS with timely, detailed information on transactions worthy of closer scrutiny.  Finally, the new electronic filing requirements will also provide the IRS with detailed and current information on corporate matters that may be of interest or concern.

It is also important to note that modifying the policy of restraint could result in greater IRS audit controversy and increased litigation.  For example, taxpayers might more aggressively invoke the work product doctrine to shield documents included as part of tax accrual workpapers.  Furthermore, if tax accrual workpapers are routinely requested, one of the current incentives to disclose “listed” tax shelter transactions will be eliminated.  Audits could become more contentious because field agents may be tempted to view FIN 48 reserves as the minimum acceptable adjustment.

We also note that FIN 48 will not apply to all companies that are subject to US tax.  In particular, companies that are listed on foreign exchanges and do not prepare GAAP financials would not be subject to FIN 48.   Any change to the policy of restraint for FIN 48 workpapers would make US capital markets less competitive.

For these reasons, we strongly urge the IRS to maintain its policy of restraint with respect to tax accrual workpapers, including those underlying FIN 48 disclosures.

We appreciate your consideration of our views on this important issue.  We would be pleased to discuss this issue in more detail with you or your staff.  Please do not hesitate to contact Mark Prysock, General Counsel, FEI, at (202) 626-7804.

Very truly yours,

/signed/

David A. Heywood

Chairman

FEI Committee on Taxation

cc:        Honorable Mark W. Everson

            Honorable Donald L. Korb

            Honorable Eric Solomon