AICPA Recommendations for Reducing Schedule M-3 Burdens

AICPA Activities

In a letter to Heather Maloy, commissioner of the IRS’s Large Business and International Division, Patricia Thompson, chair of the AICPA’s Tax Executive Committee, called on the IRS to collaborate with external stakeholders in revising Schedule M-3, Net Income (Loss) Reconciliation, and suggested some revisions to reduce taxpayers’ compliance burdens.

The IRS introduced Schedule M-3 as an examination tool for corporations, to increase transparency and standardize the reporting of book-tax differences. In her letter, Thompson asked the IRS to explain how it is currently using the data it gets from Schedule M-3 filings. She noted that in the experience of AICPA members, there has been little change in how the IRS examines taxpayers outside the Compliance Assurance Program, “with examiners still requesting complete book to tax detail for all general ledger accounts.”

Thompson also noted that taxpayers are spending significant amounts of extra time properly reporting items on Schedule M-3, including time spent mapping general ledger income/expense accounts to column (a), reconciling individual line items to report taxable income totals in column (d), and providing supporting data for cost of goods sold on Form 8916-A, Supplemental Attachment to Schedule M-3.

As a result of these and other increased taxpayer burdens, the AICPA recommends the following changes:

• Eliminating required completion of columns (a) and (d) of Parts II and III of Schedule M-3;
• Eliminating Form 8916-A;
• Eliminating and revising certain lines on Parts II and III of Schedule M-3 or, alternatively, replacing them with an expanded Schedule M-1 that would be used by all business taxpayers; and
• Expanding the use of Schedule B (Form 1120, U.S. Corporation Income Tax Return) and Schedule C (Form 1065, U.S. Return of Partnership Income) for risk assessment in lieu of adding new lines and requesting additional supporting detail on Schedule M-3.