Monday, August 15, 2011

Schedule M-3 Changes by IRS Spur Confusion, E&Y Says

By Liz White

Recent and previous changes by the Internal Revenue Service to the requirements for the research and development attachment to Schedule M-3 have created significant uncertainty for taxpayers, according to an Aug. 10 e-mail alert from Ernst & Young.

However, the Big Four firm recommended that taxpayers who do not have the information readily available should still attempt to comply with new requests with the information they do have. To be prepared for the requirements, taxpayers should indicate in their files the data supporting the amounts disclosed and the steps taken to comply with the request, the E&Y alert said.

The firm is advising its clients to make a good faith attempt to comply with the requirement and include the information that is available, Chris Ohmes, a partner in federal tax services with Ernst & Young in Washington, D.C., told BNA.

In October, IRS added new lines to the Part III for R&D costs and Section 118 exclusions that asked taxpayers to include additional information about the R&D costs line.Tax practitioners thought the requirement for the additional information was burdensome to taxpayers and asked IRS to alter the requirements.
Information Still Necessary

IRS released guidance for how taxpayers should file the schedule M-3. However, this change, along with the August announcement that taxpayers do not have to include the additional information for tax years 2010 and 2011, has created “uncertainty as to exactly how taxpayers should comply with this new information request on their 2010 tax returns,” the E&Y alert said.

Although taxpayers do not have to include an attachment, they still must develop the information to fill out the line item, the alert said. Because many taxpayers do not regularly collect the necessary information, they may encounter difficulties in complying with the requirements.

“It does appear that they still want taxpayers to obtain all of this detail and keep it,” Ohmes said. “It's just that what they are doing now is that they aren't asking taxpayers to file it with the return.”

However, IRS may be aware of the burden the information reporting poses on taxpayers since it has twice diluted the requirements in a short period of time, the alert said.

“What this seems to indicate is that the IRS is trying to find a way to soften or relax the information that needs to be reported with the return, but that they still seem to be signaling to taxpayers that they do want this information in the event that they come in and conduct an examination,” Ohmes said.
Questions Remain

The information IRS wanted included went beyond what taxpayers normally provided, Ohmes said. The tax community has been trying to figure out why IRS wanted the information.

If IRS is going to keep the Schedule M-3 requirement, it would be appropriate to have more instruction on exactly what the service is looking for and it should consider a more practical approach to getting the information, Ohmes said.
Related Information

The complete text of this article can be found in the BNA Daily Tax Report, August 12, 2011.

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