The taxman cometh … with a vengeance

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Federal, state and local governments are all taking extra measures to ensure that they are not leaving any corporate tax revenue on the table as many are facing budget shortfalls.” –Frank Lavadera, principal-in-charge of KPMG LLP's Tax Dispute Resolution Services Network.

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I’ll spare you a long soliloquy concerning my own esoteric views on taxation policy (I did WAY more than enough of that where fuel taxes are concerned) to say simply this: don’t be surprised if you get the mother of all audits this year, by federal and state revenue agencies alike.

Because money is extremely tight right now – a problem compounded by the nearly $15 trillion (and growing) national debt, alongside the fiscal devastation wreaked by the Great Recession – the federal government and states are turning up the heat on corporate tax audit activities in their continued efforts to capture more tax revenue, according to a recent survey conducted by KPMG LLP.

This should surprise no one, especially as the still-wretched health of the U.S. residential housing market and high unemployment levels have torpedoed two of the traditional sources of tax revenues at both the national and state level.

Thus the business community (and trucking is certainly a card-carrying member of that group) is finding itself much more frequently in the crosshairs of a variety of taxation authorities these days.

Among the 890 corporate tax executives surveyed by KPMG, nearly two-thirds (61%) said federal tax dispute activity had increased in the past 12 months, while more than one-third (37%) said the total number of state tax audits in jurisdictions in which they do business increased.

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The majority of respondents to KPMG’s survey expect this trend of increased audit activity at the federal and state level to continue. Over the next 12 months, 67% of the respondents expect federal tax dispute activity to increase, while 53% expect state tax audit activity in jurisdictions in which they do business to increase.

“Federal, state and local governments are all taking extra measures to ensure that they are not leaving any corporate tax revenue on the table as many are facing budget shortfalls,” noted Frank Lavadera, principal-in-charge of KPMG LLP's Tax Dispute Resolution Services Network.

“Tax directors, CFOs, and corporate boards should keep the increased likelihood of an audit by taxing authorities high on their priority lists as it presents a significant tax risk,” he warned. “It is clear that taxing authorities are demanding greater transparency and imposing more complex reporting requirements, while the IRS [Internal Revenue Service] and various states are adding tax audit personnel to increase the number of exams they can conduct.”

According to findings from the Treasury Inspector General for Tax Administration, said Lavadera, IRS enforcement revenue in fiscal year 2010 increased by 18% to $57.6 billion and corporate examinations increased by 5%. Thus it would be wise for the business community to expect more of the same for fiscal year 2011.

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About one quarter of the respondents to KPMG’s poll also expect regulators from non-U.S. jurisdictions to increase their tax audit activity over the next 12 months, while only 29% believe it will remain the same. In the past 12 months, 17% of respondents indicated that foreign tax dispute activity had increased at their companies, while 20% said it remained the same.

“Companies should be aware that transfer pricing is a hot button tax audit issue in both the U.S. and abroad,” noted Brian Trauman, principal-in-charge of KPMG's Transfer Pricing Dispute Resolution practice

“Since providing exam teams with the right information promptly can sometimes be difficult for audits related to transfer pricing, the development of robust information-gathering processes before an audit is critical,” he stressed.

Indeed, KPMG has a big piece advice for the business community in light of all this taxing activity: regularly review your accounting methods, tax returns, risk assessments, and other processes and take the time to identify the documents, people, time and resources that might be needed to handle a potential tax audit.

Because, with the U.S. economy still stuck in slow gear and the consumer tax base still in tatters in many respects, businesses are going to be looked at by the taxman as a way to help fill in the fiscal holes in the balance sheets at the federal and state level alike.

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