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DRAFT M-3 RECONCILIATIONS ISSUED FOR PARTNERSHIPS AND S CORPORATIONS

December 20, 2005

The IRS is getting ready to make partnerships and S corporations start filing the long-form book-tax reconciliation, schedule M-3, starting with 2005 returns due in 2006. The IRS has now published draft versions of the forms. C corporations with assets over $50 million led the way last year with the first M-3 filings; the threshold is $10 million for 2005 C corporation returns.

The M-3 is designed to make tax filings more transparent to examiners by making it more difficult to bury questionable deductions. Instead of the old 8-line summary in form M-1, M-3 filers face a three-page, 68-line inquisition that forces you to list out all of your differences between financial accounting and taxable income. The IRS hopes to prevent hide-the-ball tactics like that used by Long-term Capital Management, who buried a $106 million bogus tax shelter loss on M-1 in "net unrealized gains."

Here is a sample from the draft S corporation M-3: