It's a nondescript door on the second floor of a downtown Omaha office building, but the work that goes on there is worth billions to the federal government.
The office houses Internal Revenue Service agents charged with monitoring taxes owed by Berkshire Hathaway Inc., the Midlands' largest business and one of the IRS's biggest clients.
Less than a mile away, another ordinary door in a ConAgra Foods building opens to another IRS office, where agents work so closely with corporate tax preparers that the food manufacturer's tax returns are, more or less, pre-audited when they're filed.
Not every business has embedded IRS agents, but then again, few businesses will match Berkshire's estimated $8 billion-plus tax bill or ConAgra's $400 million tax expense for 2013.
Although both are Fortune 500 companies, each has its own IRS agents for different reasons.
The IRS audits Berkshire's annual tax returns, working out settlements and adjustments years after they are filed — the standard auditing system used for nearly all corporate taxpayers.
ConAgra, by contrast, is one of about 150 large businesses that voluntarily share financial information with the IRS as it happens, resolving differences and preparing tax returns that receive advance IRS approval and don't need to be audited later.
ConAgra takes part in the IRS's Compliance Assurance Process, or CAP, while Berkshire does not.
Find the latest in local business and development, from who's saying what to what's going in at that corner, in the Money Talks blog.
If you would be spooked by having an IRS agent stationed next door, listen to Randy Harvey, tax vice president for ConAgra:
“We feel really good about the interaction with the IRS team members and the collaboration we have and the sense of urgency we have about getting issues resolved prior to filing the return. It's worked out well.”
So well, Harvey said, that for 2015 the company will move to “the Nirvana of the audit process,” a relationship with the IRS so close that the company's tax staff will essentially self-audit returns on all but the newest and most complex tax issues.
“We've come to a place where our team and the IRS team have a lot of confidence and trust in each other, and they know we're doing the right things,” Harvey said. “We're getting as close to kind of the world-class IRS exam process as you can be.”
In Berkshire's case, the nearby IRS agents reflect the company's size and the amount of work it takes to determine the federal taxes that the Omaha-based conglomerate owes from its estimated $30 billion in pre-tax profit in 2013, plus audits for past tax years.
Last year Berkshire reported that the IRS had settled audits of its pre-2005 returns, had tentatively resolved “proposed adjustments” to its 2005-2009 returns and, in 2012, began auditing its 2010 and 2011 tax returns.
The relationship between Berkshire and the IRS isn't always cordial. A 2011 lawsuit by Berkshire's NetJets private aviation company, still pending, raises the issue of whether its customers should have to pay excise taxes for each flight. The IRS had submitted a $600 million bill for past taxes.
Companies involved in lawsuits with the IRS can't join the compliance program because it requires “transparent” disclosure of financial information, which would be tough when you're preparing legal arguments.
In 2005, Berkshire won a federal court challenge to an IRS ruling that had added $15.6 million to its taxes. That's a small amount compared with Berkshire's annual revenue, but Berkshire Chairman and CEO Warren Buffett said he went to court because “we think we're right.”
Buffett also has said taxes are the price of being part of the world's greatest economic system. “Berkshire prospers in America as it would nowhere else,” he wrote to his stockholders in 1997, although he noted that the company's 2003 tax return created a stack of papers 7 feet tall.
Three Omaha accounting professors said the IRS advance compliance program is a good idea.
Even an honest mistake from misinterpreting the complex, changing tax code can be expensive and can damage a corporation's name, said Raval Vasant from Creighton University. “This is a way to protect your reputation” and save the cost of litigation and repairing brand damage.
Having an IRS agent nearby can bring benefits much like a business stationing an executive in the office of a major client, he said.
“The more you understand what they need and how things can get better through cooperation, the more you benefit and the more they benefit,” Vasant said. “Embedding your people in others' organizations is a really smart idea. For the IRS, these are all clients, in a sense.”
Time and money spent fixing a past tax return adds no value to a company, he said. “If you do things right the first time, you won't have that cost.”
Timothy Yoder of the University of Nebraska at Omaha said accounting rules require businesses to report “aggressive” tax positions as a liability that might be modified later by the IRS. The CAP program removes the need to declare that liability, Yoder said, because the calculations are certain.
Creighton's Thomas Purcell III said CAP is one of several efforts by the IRS to reach agreements with corporate taxpayers before they file returns, such as advance approval for some foreign trade transactions.
“Part of this is an outgrowth of the fact that the IRS doesn't have as many compliance resources as they did at one time,” Purcell said. “They've had to be more creative and resourceful when it comes to doing examinations.
“They wouldn't do it for you and me. But if it's a situation where it's a complex business, and by coming to some understanding in advance, (a business) just avoids problems after the return is filed.”
The IRS began CAP in 2005 with 16 large taxpayers. There are now more than 150, and the number is growing.
A report last year by the Treasury Department's inspector general said that the CAP audits “are consuming substantially more staff hours than those under the traditional audit process” and recommended charging fees for the program.
Heather Maloy, who heads the IRS's large-business and international division, said that's because CAP audits involve a small number of the largest taxpayers, while the larger number of traditional audits includes many smaller, simpler audits. She said the IRS would consider charging fees.
ConAgra VP Harvey said that if the IRS starts charging fees for CAP, the company would examine the program's benefits and make a business decision on whether to continue.
The company joined CAP for the 2009 year because of the amount of work involved in tax filings and later audits. Post-filing audits used to take years and require digging up financial records five or more years old, sometimes after company accounting personnel had changed.
ConAgra companies also file about 300 local and state tax returns, and amending a federal return sometimes required amending those, too.
The first few years in CAP required “learning on both sides,” Harvey said, as the company and the IRS team found out more about each other's operations. Post-filing audits continued for the first two years, but for tax returns in 2011, 2012 and the 2013 — no audits.
“The idea is to have a lot more dialog and discussion and up-front understanding of the issues so that we can present our position and how we think it can be handled,” he said. “If we disagree, we work to come to conclusions before filing the return, hopefully.”
Once the return is filed with IRS approval, it's not subject to further auditing.
Time spent on IRS issues and audits is down by two-thirds, he said. “We still spend time documenting and discussing non-routine transactions with the exam team, but the time spent on routine issues is minimal.”
In 2015, ConAgra will become one of about 50 companies in the IRS' CAP Maintenance program, which puts more responsibility on the company to follow IRS rules.
“We're trying to be good corporate citizens,” he said. “We have very few issues with the IRS anymore.”
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.