Actions Are Being Taken to Address the Impact That International Financial Reporting Standards Will Have on Tax Administration
September 8, 2010
Reference
Number: 2010-30-112
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Phone
Number | 202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
ACTIONS ARE BEING TAKEN TO ADDRESS
THE IMPACT THAT INTERNATIONAL FINANCIAL REPORTING STANDARDS WILL HAVE ON TAX
ADMINISTRATION
Highlights
Final
Report issued on September 8, 2010
Highlights of Reference
Number: 2010-30-112 to the Internal
Revenue Service Commissioner for the Large and Mid-Size Business Division.
IMPACT ON TAXPAYERS
One of the Internal Revenue Service’s (IRS) goals from
its Strategic Plan for 2009-2013 is to enforce the law to ensure everyone meets
their obligation to pay taxes. The Large
and Mid-Size Business Division’s Strategic
Initiatives and
Fiscal Year 2009 Priorities also included developing a Servicewide strategy to
address the consequences of the expected conversion to the International
Financial Reporting Standards (IFRS).
The IRS is positioning itself to address the impact that the IFRS will
have on tax administration and the taxpayer.
WHY TIGTA DID THE AUDIT
The
Large and Mid-Size Business Division’s Strategic Initiatives and Fiscal Year
2009 Priorities included engaging with tax professionals who provide tax advice
on international administrative, technical, and information reporting
matters. As part of this strategic
initiative, the Large and Mid-Size Business Division planned to identify and
monitor emerging issues related to the
adoption of the IFRS. This audit was initiated as part of the
Fiscal Year 2010 Annual Audit Plan and addresses the major management challenge
of Globalization. The overall objective
of this review was to assess the IRS’ progress to prepare for the tax issues
and implications of converting from United States Generally Accepted Accounting
Principles to the IFRS.
WHAT TIGTA FOUND
The IRS
is in the process of providing awareness training to IRS employees and managers
by introducing them to IFRS concepts and potential issues. It also is providing technical advice and
guidance to employees conducting examinations of returns filed based on the
IFRS.
The IRS appropriately coordinated with the tax practitioner
community to outline IFRS implementation concerns. In addition, the IRS is in the process of developing
procedures to address significant issues related to IFRS.
WHAT TIGTA RECOMMENDED
Although
TIGTA made no recommendations in this report, IRS officials were provided an
opportunity to review the draft report.
IRS management did not provide any report comments.
September 8, 2010
MEMORANDUM FOR COMMISSIONER, LARGE AND MID-SIZE BUSINESS DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Actions Are Being Taken to Address the Impact That International Financial Reporting Standards Will Have on Tax Administration (Audit # 201030040)
This report presents the results of our review to assess the
Internal Revenue Service’s progress to prepare for the tax issues and
implications of converting from United States Generally Accepted Accounting
Principles[1]
to International Financial Reporting Standards.[2] This audit was conducted as part of our
Fiscal Year 2010 Annual Audit Plan and addresses the major management challenge
of Globalization.
Although we made no recommendations in this report, we did provide Internal Revenue Service officials an opportunity to review the draft report. Management did not provide us with any report comments.
Copies of
this report are also being sent to the Internal Revenue Service managers
affected by the report findings. Please
contact me at (202) 622-6510 if you have questions or Margaret E. Begg, Assistant
Inspector General for Audit (Compliance and Enforcement Operations), at (202) 622-8510.
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Abbreviations
|
GAAP |
Generally Accepted Accounting Principles |
|
IFRS |
International Financial Reporting
Standards |
|
IRS |
Internal Revenue Service |
|
LMSB |
Large and Mid-Size Business |
|
SEC |
Securities and Exchange Commission |
|
|
|
International Financial Reporting Standards (IFRS), which
are issued by the International Accounting Standards Board,[3]
are a set of accounting standards that
serve as a framework for financial reporting.
The IFRS are rapidly gaining worldwide acceptance and are now used for
public reporting purposes in more than 100 countries, including member
countries of the European Union,
The SEC established several milestones that, if achieved, could lead
to the mandatory use of the IFRS in Calendar Year 2015 at the earliest.
In November 2008, the Securities and Exchange Commission
(SEC)[4] proposed a “Roadmap” that would
potentially require United States (U.S.) domestic issuers of annual reports to
the SEC to use the IFRS.
As capital markets become
increasingly global,
The SEC proposed the “Roadmap”
as part of its consideration of the role a single set of high-quality
accounting standards plays in investor protection and the efficiency and
effectiveness of capital formation and allocation. The “Roadmap” sets forth several milestones
that, if achieved, could lead to the mandatory use of the IFRS by
In 2007, the SEC removed the requirement for non-U.S. companies reporting financial results using the IFRS to reconcile to U.S. GAAP. This rule became effective for periods ending after November 15, 2007.
In a related matter, the International Accounting Standards Board and Financial Accounting Standards Board have embarked on a joint project to develop an improved common conceptual framework that provides a sound foundation for developing future accounting standards. Such a framework is essential to fulfilling the goal of both Boards to develop standards that are principles-based, internally consistent, internationally converged, and that lead to financial reporting that provides the information that investors need to make decisions in their capacity as capital providers. The new framework, which will deal with a wide range of issues, will build on the existing frameworks of both Boards and consider developments subsequent to the issuance of the conceptual framework.
The IRS’ Large and Mid-Size Business (LMSB) Division developed a Servicewide Approach to International Tax Administration[8] that identifies its Strategic Initiatives and Fiscal Year 2009 Priorities. The LMSB Division’s approach to international tax administration follows the IRS Strategic Plan for 2009-2013. In relation to the IRS’ goal to enforce the law to ensure everyone meets their obligation to pay taxes, the LMSB Division’s Strategic Initiatives and Fiscal Year 2009 Priorities included engaging with tax professionals who provide international tax advice on international administrative, technical, and information reporting matters. As part of this strategic initiative, the LMSB Division planned to identify and monitor emerging issues relating to adoption of the IFRS. The LMSB Division’s Strategic Initiatives and Fiscal Year 2009 Priorities also included developing a Servicewide strategy to address the consequences of the expected change to the IFRS.
In early 2009, the LMSB Division began developing plans for strategic and operational activities relating to adoption of the IFRS. It identified that a multi-functional working group, referred to as the IFRS Team, led by the Director of Pre-Filing and Technical Guidance, LSMB Division, would plan and monitor the ongoing activities. Currently, the Pre-Filing and Technical Guidance office maintains an IFRS Technical Guidance Web Site that identifies contacts for the IFRS Team and provides resources related to IFRS accounting and procedures. In terms of training, audit tools, and reference materials, agents are expected to rely on the IFRS Team’s technical advisors for case specific guidance until written procedures are provided.
This review was performed at the IRS National Headquarters and the LMSB Division’s Pre-Filing and Technical Guidance office in Washington, D.C., and at Pre-Filing and Technical Guidance’s Financial Accounting Issues office in New Haven, Connecticut, during the period March through June 2010. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Internal Revenue Service Employees Are Being Provided With International Financial Reporting Standards Awareness Training and Guidance
The existing focus of the IRS’ IFRS Team is to provide awareness training to IRS employees and managers by introducing them to IFRS concepts and potential issues. The Team is conveying that some companies7[9]are already filing returns that were prepared based on the IFRS. As part of the awareness training, employees are encouraged to contact the IFRS Team when conducting an examination of an IFRS-related return. This practice will enable the IFRS Team’s technical advisors to provide advice and identify issues that need to be addressed. Because employees are not required to contact the IFRS Team, the Team has also taken a proactive approach to getting involved and providing guidance by identifying current examinations of IFRS-related returns and contacting the related managers. We reviewed documentation indicating the IFRS Team has given more than 20 presentations on the IFRS to IRS employees since September 2008. The IFRS Team has plans to continue making presentations and holding workshops into Fiscal Year 2011. In addition, the IFRS Team will record pertinent training sessions and post the sessions on a training web site for employees to download and review.
The IFRS Team created a general presentation, identified as IFRS 101, that provides information on:
The presentations are modified to ensure pertinent information is shared with various and/or specific audiences. During this review, we attended two presentations and found the information provided was tailored for each audience. For example, the presentation given to a group of international examiners provided in-depth information on the significant subject matter differences between U.S. GAAP and the IFRS, while the presentation given to the Issue Focus Group only briefly touched on these differences.
The Internal Revenue Service Appropriately Coordinated With the Tax Practitioner Community to Outline International Financial Reporting Standards Implementation Concerns
During the early stages of developing plans for strategic
and operational activities relating to the IFRS conversion, the IFRS Team
reached out to several external stakeholders for their assistance in identifying
and outlining IFRS implementation concerns. External stakeholders included the American
Institute of Certified Public Accountants, the Big Four,8[10]large
regional accounting firms, and firms associated with the Dow Jones Industrial
Average.9[11]
The IRS held several teleconferences with the stakeholders and obtained insight
on issues potentially affecting the tax community. As a result, various areas of concern were
identified that could affect
In addition to the teleconferences and roundtables, the IFRS Team indicated they have given several external presentations and participated on panels with tax professionals. The IFRS Team is currently in the process of gathering information that will assist them in solidifying issues related to IFRS implementation. As issues are solidified and guidance is developed, the IFRS Team will present updated information to the tax community by continuing to engage in external presentations with tax professionals and taxpayer groups. The IFRS Team will also post additional guidance for the tax community to their web site.
In a related matter, the IFRS Team has also had limited indirect contact with taxpayers. The IFRS Team is responsible for monitoring events in the field to provide their guidance and to facilitate the IRS Chief Counsel’s guidance for tax issues that arise. When the IFRS Team’s technical advisors become involved with existing cases, various activities occur. Specifically, on many occasions, they receive telephone calls where they provide quick answers to the field employees. In other instances, where the substance of the contacts requires greater attention, the technical advisors make visits to the field sites on these cases. The IFRS Team Manager indicated to us that these case visits are learning experiences for the employee, technical advisors, and also for the taxpayers being audited.
Procedures Are Being Developed to Address Issues Related to the International Financial Reporting Standards
The IFRS Team is currently overseeing an Issue Focus Group that
is addressing issues related to IFRS conversion efforts. The Group consists of the IFRS Team’s technical
advisors and subject matter experts within the IRS who have been selected to
review, in relation to specific issues/topics, the differences between U.S. GAAP
and the IFRS. The Group will be
responsible for creating guidance, by topic, which will serve as audit aids for
IRS employees who conduct examinations of tax returns. The Treasury Inspector General for Tax
Administration plans to review the guidance and procedures once the IRS has
fully implemented them. The IFRS Team
designed a standardized template to assist the Group in creating the audit aids
and to ensure consistency in format. The
template identifies the sections of information that must be included, as well
as the order in which they are to be presented.
The required sections include an overview of the issue/topic, a
description of the related standards under U.S. GAAP and the IFRS, differences
between the standards, the related
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to assess the IRS’ progress to prepare for the tax issues and implications of converting from U.S. GAAP[14] to the IFRS.[15] To accomplish this objective, we:
I. Identified the actions taken or planned to be taken by the IRS to prepare and train employees to handle changes resulting from conversion to the IFRS.
A. Interviewed IRS management.
B. Identified and reviewed related training documentation and evaluated the content.
II. Identified the actions taken or planned to be taken by the IRS to establish and/or revise procedures to correspond with changes resulting from conversion to the IFRS.
A. Interviewed IRS management.
B. Identified and reviewed related procedural documentation and evaluated the content.
III. Identified the actions taken or planned to be taken by the IRS to provide information and support to the taxpayer community (taxpayers and representatives) to handle changes resulting from conversion to the IFRS.
A. Interviewed IRS management.
B. Identified and reviewed documentation created to provide guidance to the taxpayer community on conversion to the IFRS.
IV. Identified the actions taken or planned to be taken by the IRS to create and/or revise tax forms and instructions to correspond with changes resulting from conversion to the IFRS.
A. Interviewed IRS management.
B. Identified and reviewed related documentation and evaluated the content.
V. Identified the actions taken by the IRS to address the impact of the SEC’s removal of the requirement for non-U.S. companies reporting financial results using the IFRS to reconcile to U.S. GAAP.
A. Interviewed IRS management.
B. Reviewed related documentation.
Internal controls methodology
Internal controls relate to management’s
plans, methods, and procedures used to meet their mission, goals, and
objectives. Internal controls include
the processes and procedures for planning, organizing, directing, and
controlling program operations. They
include the systems for measuring, reporting, and monitoring program
performance. We determined the following
internal controls were relevant to our audit objective: sound project management guidelines for planning,
executing, monitoring, and controlling project activities. We evaluated these controls by interviewing
management and reviewing project documentation.
Appendix II
Major Contributors to This Report
Margaret E. Begg, Assistant Inspector General for Audit (Compliance and
Enforcement Operations)
Amy L. Coleman, Audit Manager
Todd M. Anderson, Lead Auditor
Melvin V. Thomas, Senior Program Analyst
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Commissioner, Small Business/Self-Employed Division SE:S
Deputy Commissioner, Large and Mid-Size Business Division SE:LM
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Deputy Commissioner, International SE:LM:IN
Director, Pre-Filing and Technical Guidance, Large and Mid-Size Business Division SE:LM:PFTG
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal
Control OS:CFO:CPIC:IC
Audit
Liaisons:
Commissioner, Large and Mid-Size Business Division SE:LM
Commissioner, Small Business and Self-Employed Division SE:SE
[1] Generally Accepted Accounting Principles are a set of standards and procedures used by companies to prepare and report financial information.
[2] International Financial Reporting Standards are a set of accounting standards used in more than 100 countries that serve as a framework for financial reporting.
[3] The International Accounting Standards Board, an independent, privately funded organization, is responsible for developing the IFRS and promoting the use and application of these standards.
[4] The SEC’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC requires public companies to disclose meaningful financial and other information to the public.
[5] The GAAP are a set of standards and procedures used by companies to prepare and report financial information.
[6] The Financial Accounting Standards Board, a private, not for profit organization, was established in 1973 and was designated by the SEC as the organization responsible for setting standards of accounting that govern preparation of financial reports by publicly held companies in the U.S.
[7] The International Accounting Standards Committee Foundation is the parent entity of the International Accounting Standards Board and is an independent, not-for-profit, private sector organization working to develop a single set of high quality, understandable, enforceable, and globally accepted International Financial Reporting Standards.
[8] Revision 3, dated April 10, 2009.
7[9]The IFRS Team determined that approximately 220 companies are currently filing returns using the IFRS.
8[10]The Big Four is the reference for the four
largest international accountancy and professional service firms – PricewaterhouseCoopers,
Deloitte Touche Tohmatsu, Ernst & Young, and KPMG.
9[11]The Dow Jones Industrial Average is an index that shows how 30 large, publicly owned companies, based in the U.S., have performed during a standard trading session in the stock market.
10[12]The audit aids for some issues are scheduled for completion by August 31, 2010. Completion of other audit aids will take longer for those issues that are more complex or that are subject to change due to convergence efforts of the Financial Accounting Standards Board and the International Accounting Standards Board.
[14] The GAAP are a set of standards and procedures used by companies to prepare and report financial information.
[15] The IFRS are a set of accounting standards used in more than 100 countries that serve as a framework for financial reporting.