The Wall Street Journal today had an interesting article on the new regulation called FIN 48 that requires companies to disclose how much they set aside as reserves in case the transactions that have gotten the companies tax relief don’t pass muster.
Would it not logically then follow that the higher the amount any company reports as reserves, the higher the company might be at risk of transactions not passing the audit? I of course, mean this on a relative comparison level. And, then would this mean the more the amount of reserves, the higher the chances that the IRS or any other regulatory agency will be scrutinizing those companies and those transactions?
And, then the other question is, does the size of this reserve also able to quantify the relative risk the company has taken on. Are we incentivising the companies to have smaller reserves so as to not attract the attention of IRS? Or, are we preventing the companies from thinking creatively but within legal bounds of course?
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