IRS Cuts Deals

The other day the IRS announced new rules for settling tax liabilities for individuals. It’s a sweet deal. I thought that was interesting. Then yesterday we get an announcement from Altria (MO) that they too have cut a deal with the boys at the IRS. Coincidence? Leading indicator? Some details:

Individuals - The IRS spells out the new terms for individuals who are delinquent here.

Summary:

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

The basis of settlement is now 25 cents on the dollar. (a percentage of 1 year of income vs. 4) if payment is made in less than five months. The IRS has provided a big incentive to settle fast.

Altria

If you look at the headline you would think that poor old MO took it in the ear on this one. $500m is big bucks for anyone, especially if it is paid to the IRS. But actually this is “good news” for the company.

Altria got nailed by the IRS as a result of aggressive tax accounting on leveraged leases it owned. The potential loss could have been $1b. Last year MO took a charge of $627m to cover the cost of a settlement. The deal it cut with the IRS is well under budget.

MO will end up with a gain of 3 cents ($61m) a share as a result of the settlement. The difference between last year's charge and the amount paid to the IRS is $127m. The net gain to the shareholders of only $61m means that the litigation expense was a cool $66 mil.

I’m thinking that the lawyers and the MO top brass are drinking expensive champagne and smoking Luckies with this result.

I have a few questions:

- The IRS is Treasury and Treasury is the White House. The change in policy on cutting deals comes from the WH. Why? The fact that the new rules are geared to cash settlements in less than five months is curious. The election is in five and a half months. Are these guys trying to rig numbers to show some improvement on the tax receipt line? I wouldn’t put it past them.

- What’s the message here? Don’t pay your taxes and later cut a deal for 25 cents on the dollar? I’m no fan of taxes, but I, and most other folks, pay 100%. I wonder if the precedent being set by the IRS won’t undermine its ability to collect that 100%.

A thought:

If you believe that this WH is willing to cut tax deals to raise much needed cash, then you're apt to believe that there is plan for a tax holiday on corporate foreign income. There is a about $1 trillion of untaxed earnings sitting outside the US currently. The tax on this would come to about $200 billion. Look for a proposal from the WH to give US multinationals corporations another tax break. They would pay $100b and keep the other $100b.

More champagne and smokes…