Among the 890 corporate tax executives surveyed, nearly two-thirds (61 percent) said federal tax dispute activity had increased in the past 12 months, while more than one-third (37 percent) said the total number of state tax audits in jurisdictions in which they do business increased.
The majority of respondents to the KPMG survey expect this trend of increased audit activity at the federal and state level to continue. Over the next 12 months, 67 percent of the respondents expect federal tax dispute activity to increase, while 53 percent 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,” said 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,” said Lavadera. “It is clear that taxing authorities are demanding greater transparency and imposing more complex reporting requirements, while the IRS 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, IRS enforcement revenue increased by 18 percent to $57.6 billion and corporate examinations increased by five percent in fiscal year 2010.
Preparation Is Critical
KPMG believes that companies of all sizes should take steps to ensure they have policies and procedures in place to be fully prepared before they receive an audit notification, as the audit process can be time-consuming and strain resources for the unprepared.
Sharon Katz-Pearlman, principal-in-charge of KPMG LLP’s Tax Controversy Services practice, said, “Companies should regularly review their 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.”
International Tax Dispute Activity also Increasing
About one quarter of the respondents also expect regulators from non-U.S. jurisdictions to increase their tax audit activity over the next 12 months, while 29 percent believe it will remain the same. In the past 12 months, 17 percent of respondents indicated that foreign tax dispute activity had increased at their companies, while 20 percent said it remained the same.
Brian Trauman, principal-in-charge of KPMG LLP’s Transfer Pricing Dispute Resolution practice, added, “Companies should be aware that transfer pricing is a hot button tax audit issue in both the United States and abroad. 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.”
The KPMG survey was conducted in October during a KPMG Tax practice-sponsored event focused on tax dispute resolution.
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm, is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 138,000 professionals, including more than 7,900 partners, in 150 countries.
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