Reference no: EM133258418
Imagine that you are a CPA working for an accounting firm. Your client is a Fortune 500 public company that has revenues exceeding $10 billion. It is a fast-growing company that has engaged your firm to handle all tax compliance and consulting. The client has recently received notification from the IRS, and they have determined that they will be under audit for the prior tax year. The client contacts you to help them through this process. While meeting with the IRS to understand what they need for their audit, you provided the IRS with your client's trial balances, recent tax return work papers, and the tax returns themselves. After further review of those documents, the IRS provided your client with a Notice of Proposed Adjustment (NOPA) related to per diem expenses that the client has been providing to their employees when they travel for business. The per diems were for the combined lodging and meal expenses. The IRS is recommending that these per diems are nondeductible at a rate of 50 percent. The adjustment they have proposed is $5 million. While discussing the issue with your client, you learn that they have accounted for per diem expenses the same way for the past several years in their tax returns. You estimate that the fees associated with your services will be $250,000. This fee includes defending your client before the IRS, drafting a response plan, preparing a NOPA response, and defending your client through an appeal.
Discuss the circumstances in which a public company must record financial statement reserves for tax contingencies, supported by specific examples.
Explain the implications of the uncertain tax position on your client's current-year Form 10-Q and Form 10-K. Support your response with information from the Securities Exchange Commission (SEC) and generally accepted accounting principles (GAAP).
Advise your client on whether or not to record a reserve in their financial statements for the current tax year, and explain your reasoning.
Advise your client on whether or not to record a reserve in their financial statements for prior tax years still open under statute of limitations, and explain your reasoning.