Every year, companies publicly state that some of the tax breaks they claim are unlikely to stand up to tax scrutiny. And every year, companies report that they will keep some of the dubious tax breaks they have declared over the past few years simply because the statute of limitations expired before tax authorities reached conclusions. This suggests that due to cuts in their enforcement budget, the IRS may not even investigate companies publicly disclosing that they have claimed tax breaks that tax authorities would likely find illegal.
In 2020, ExxonMobil, General Electric, Verizon, Apple, and ten other companies announced that they would be keeping $ 1.3 billion in tax breaks that had already been requested for this reason.
For more than a decade, tax law has required publicly traded companies to publicly report “Uncertain Tax Benefits” (UTBs), which are defined as tax breaks that are unlikely to be approved by the authorities. Companies report UTBs via the 10-k that they file and publish with the Securities and Exchange Commission.
Listed companies also report when they finally comply with these tax breaks. Sometimes this happens because the tax authorities approve or resign themselves to the companies to avoid lengthy litigation.
The problem is that companies often claim to keep these tax breaks even if they are not approved by the tax authorities because the statute of limitations has expired, which can happen in three years.
It’s not always clear whether state, state, or foreign tax authorities have not fully investigated a company’s UTBs because companies do not disclose this information. However, federal corporate taxes are far higher than other taxes for these companies, so it is almost certain that most of the taxes saved will be federal taxes.
The single biggest beneficiary of UTBs that expired in 2020 was ExxonMobil, with tax savings of $ 237 million. General Electric and Verizon saved $ 151 million and $ 132 million, respectively. And the other 11 companies on this list each saved at least $ 50 million by successfully weathering legal efforts to monitor the limits of tax law.
This list only includes the companies that hold the most UTBs this way, companies that have saved at least $ 50 million in the past year. Dozens of other companies, including Walmart, Starbucks, Merck, Johnson & Johnson, Halliburton, and McDonalds, saw savings below $ 50 million last year.
This is not the first time ITEP has found companies maintaining previously claimed questionable tax breaks in this way. ITEP reported a similar finding last year based on 2019 data showing that only five companies combined saved $ 1 billion by expiring the statute of limitations on dubious tax breaks.
Observers have noted that large corporations appear to be playing a “tax audit lottery,” which means they take aggressive positions on their tax returns, take more breaks than a fair reading of the law is likely to allow, and expect to exceed the statute of limitations or settle less than the tax amount in question with the tax authorities.
And it looks like there is no end in sight to this behavior. As the table above shows, the 14 companies that collectively received $ 1.3 billion in tax breaks by phasing out the tax breaks in question from previous years claimed a much larger amount of uncertain tax breaks of 4.1 Billions of dollars for their income in 2020.
For example, Apple was allowed to permanently withhold $ 69 million in UTB tax breaks on previous years’ income in 2020 because the statute of limitations had expired. Additionally, an amazing $ 1.3 billion UTB tax break has been claimed over 2020 taxes.
A full investigation of companies when they state that they did something with their tax returns that is likely to be against the rules seems like the least we can expect from our tax system. However, the information in the companies’ public reports suggests this is not the case. Why not? It’s unclear, but it could be related to the cuts in the IRS budget over the past decade.
A July 2020 report by the Congressional Budget Office found that from 2010 to 2018, lawmakers cut the IRS budget by 20 percent in inflation-adjusted dollars, resulting in a 22 percent downsizing, including 30 percent of the IRS’s law enforcement staff. Natasha Sarin and Larry Summers point out that the cuts are even worse. Measured as a percentage of GDP or tax revenue, the IRS has decreased by 35 percent over the past decade. To reverse these funding cuts, they suggest that the IRS budget would need to be increased by more than $ 100 billion over the next decade.
A proposal in the President’s American Families Plan seems to accomplish most of this. It would provide the IRS with an additional $ 80 billion in dedicated funds over a 10 year period, apparently on top of the increased annual discretionary funding that the administration is also requesting.
Of course, even if it has sufficient resources to investigate, some of the tax breaks in question could be approved by the IRS. However, it seems reasonable to expect the agency to conduct an investigation and come to a conclusion one way or another after a large company waved a red flag to announce that it is doing something questionable with its taxes.