Thursday, March 9, 2023

One of the more fascinating concepts that can be found deep in the footnotes of a company’s 10-K annual report is called ‘unrecognized tax benefits’. In short, it is the difference between the amount of money the company knows they ought to pay in taxes (and therefore report on their income statement as tax expense), and the amount they actually plan on paying (and therefore report on their tax return). You see, unlike us individuals, large companies tend to treat the IRS as more of a kid brother than an angry parent.  

As a result of this, at any given time large companies have a certain amount of unpaid taxes (AKA unrecognized benefits!) that they are kind of just hoping they can get away with. And as time passes, many of these positions ‘expire’, or, that is, the statute of limitations runs out. So the IRS can no longer look to enforce payment. So they do get away with it. In total US public companies grabbed an extra $8 billion or so each of the last 2 years in total due to these expirations.

But, as you may know, the IRS picked up a large funding infusion over the summer (What the IRA budget increase for the IRS means for taxpayers: PwC), and the plan at least is for some of it to be used to go after some of these corporations. Since the companies must report these details for all of us to see…it will be interesting to watch if the numbers do in fact start dropping. In the meantime, here is a peek at ‘unrecognized tax benefits’ in 2021, and (most of) 2022:      

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