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IRS NOT SATISFIED WITH 'SCHEDULE M-3' COMPLIANCE

December 13, 2007

Corporate tax returns have long contained a reconciliation between financial statement income and taxable income. The old "Schedule M-1," still available for smaller corporations, was brief, and taxpayers tended to provide minimal detail.

To make life easier for its examiners, the IRS started requiring a more detailed reconciliation for larger taxpayers in 2004. Tax Analysts reports ($link) that many taxpayers aren't doing well with the new "Schedule M-3." The report cites IRS technical advisor Judy McNamara as saying 10% of taxpayers required to file an M-3 failed to do so, and 30 percent of the M-3s that were filed had errors:

A significant number of errors involved Part 1, line 4 of the schedule not tying to the appropriate number on the financial statement. "The whole point of Part 1 [of Schedule M-3] is so that agents don't have to reconcile to [a taxpayer's] financial accounting information," which could take months, said McNamara. McNamara said that to avoid a delay in audits, agents are being instructed that they are not supposed to reconcile that number if that number doesn't tie into the financial statements.

Other taxpayers failed to provide the line-item detail required in the report, or to include supporting schedules. Ms. McNamara says the IRS will ask for a specific non-compliance penalty if things don't improve.

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