IRS Adoption of XBRL

Table of Contents Introduction 3 Interactive Data 3 A Common Standard 3 Multi-lingual Feature 4 XBRL GL 4 Benefits 5 Accuracy 5 Traceability 5 Predictability 6 Obstacles 6 Around the World 7 HMRC iXBRL 7 Netherlands Taxonomy Project 7 Standard Business Reporting 8 Partners 8 Conclusion 9 Reference List 10

Introduction eXtensible Business Reporting Language (XBRL), the standard for electronic communication of business data has grown to become an integral part of business reporting today. The Securities & Exchange Commission’s (SEC) XBRL mandate began in 2009, requiring all public companies to submit financial statements in XBRL format (United States Securities and Exchange Commission, 2011). The Federal Deposit Insurance Corporation (FDIC) has used the standard since 2005. The Internal Revenue Service (IRS) is the latest of these immense government agencies to flirt with idea of implementing a XBRL mandate.
The purpose of this paper is to briefly (1) explore why XBRL is the preferred standard, (2) shed light on the exploratory phase that the IRS has entered and the benefits to be gained from the new standard as well as the obstacles that lie ahead, (3) look at what the rest of the world is doing, and finally (4) look at the inevitability of an IRS adoption of XBRL.
Interactive Data Unlike commercial accounting information systems, tax returns printed on paper forms and information in PDF format or in Excel spreadsheets, XBRL data does not need to be imported, converted or manually entered. This universal standard for communicating electronic data allows information to be read, shared and reused by its users. This system bridges the gap between users’ internal accounting system and the IRS’s required filing data (Hannon, 2006). Businesses, practitioners and regulatory agencies alike, will be able to process pertinent tax information with greater ease and efficiency.

A Common Standard
Collecting interactive data has become a priority for many government agencies. Amongst these are as mentioned, the SEC, the FDIC and now also the IRS. These organizations all have thousands of users—in the case of the IRS, millions of individual users—of their services. Promptly receiving the correct data in a common form permits for efficient and expeditious processing. For these agencies, “a common method of converting the data to an interactive format is required, and the method of choice is XBRL” (Hannon, 2006). XBRL has the potential to process financial statements, statutory filings, and tax returns using much of the same data (Lutes & Cohen). Eliminating redundant data input will significantly increase efficiency.
Multi-lingual Feature
XBRL will carry further benefits as it multi-lingual and not only presents information in the users’ language but also offers “links to authoritative guidance” (Lutes & Cohen). The United States has tax treaties with over 100 countries. While a multi-lingual system will not replace the need for foreign language business professionals and translators, it will alleviate some of the additional burdens of global commerce.
XBRL GL
XBRL GL (Global Ledger) as opposed to the XBRL for financial statements (as used for SEC filings), “has the detail to support tax specific information” as noted by Terry Lutes, former CIO for IT services at the IRS. XBRL GL tags the supporting details necessary for tax filings and also contains signals alerting the system of journal entries that should be included in tax calculations. These features make XBRL GL especially well suited for use by the IRS (Hannon, 2006). Some of the features that XBRL GL already possesses that make it especially suitable for tax compliance and planning are: tax specific accounts, book/tax reconciliation, and tracking of permanent/temporary differences (Lutes & Cohen).
Benefits
Adopting XBRL clearly has benefits for the IRS and its users alike. The most palpable objectives of tax reporting may be accuracy, traceability and predictability (Roytman, 2009). These are all addressed and greatly improved through the use of XBRL.
Accuracy
Human error is obviously one of the largest threats to accuracy, and they are rampant in manual entry processes. In XBRL explicit data point definitions are used, which achieves greater accuracy. This is also facilitated by the use of information predominantly derived from its defined original sources (Roytman, 2009). All organizations and entities who engage in the collection of data stand to greatly benefit from the improved accuracy furnished by XBRL. No longer will simple input mistakes be the cause of costly errors. The IRS will especially benefit, as they expend vast resources on the auditing and correction of errors in tax returns. Greater accuracy will enable the IRS to focus their extremely limited resources on pursuing tax evaders rather than mere typos and miscalculations.
Traceability
XBRL uniquely tags items of data. These tags serve as identifiers, but also provide greater detail about the item such as references and subsidiary information. This system enables the user to quickly and effectively trace a line item to its source. Derived information from original sources provides for values that are easily distinguishable, also enabling effective audits—internal as well as external (Roytman, 2009). Through the use of XBRL the IRS would be able to trace an item in question, to its original source, without ever having to involve the taxpayer. This would greatly expedite the process, allowing for shorter tax matter cycle times, and therefore increasing the extent of issues the IRS can handle.

Predictability Through the use of rules and formulas that are coded and well documented, predictability of a transaction is increased. This significantly simplifies business by making the tax code less ambiguous and alleviating the uncertainty of future tax consequences (Roytman, 2009). The use of XBRL could potentially provide such predictability that users could receive a tax ruling before a transaction has actually taken place. By allowing the IRS to view the impending transaction before concluding the matter, business can be conducted with confidence and tax matters resolved before filing of a tax return. The system would improve user understanding and aid in cutting the length of audit cycles and tax matter settlements (Hannon, 2006). Increased predictability would not only benefit business, but it would enable the IRS expedite matters as they arise. This could potentially alleviate much of the congestion that they experience immediately after tax deadline.
Obstacles
While the use of XBRL has the potential to be far superior to today’s outdated systems, it is not yet sufficiently mature to be implemented for immediate use of tax filers. The collaboration and cooperation of companies, practitioners, governmental agencies and software developers is essential for the development of a system that will provide benefits to all its users (Hannon, 2006).
Additional hurdles are created by the thousands of different tax jurisdictions existing in the United States, and with no one single agency to oversee them. For the purpose of XBRL this may potentially mean thousands of non-compatible taxonomies representing taxable transactions (Roytman, 2009). The IRS will have to work on developing XBRL into a universal system that may be utilized by all these individual jurisdictions. This poses huge upfront costs to the implementation of XBRL.
Around the World
Millions of corporations around the world have already been affected by XBRL. In the UK, 1.6 million public and private companies are required to file their taxes in XBRL format as of April 1, 2011. That number is even higher in Germany. While compliance is mostly voluntary, over 2 million companies are required to comply with new standards. China has also implemented a XBRL mandate in 11 ministries and agencies, including its tax agency. Similar programs are already in existence in Japan, Denmark, and the Netherlands, and are now under way in Ireland and the United States (Monterio, 2011).
HMRC iXBRL Filing Program The United Kingdom’s Her Majesty Revenue & Customs (UK HMRC) are mandating certain companies to file in inline XBRL (iXBRL) starting April 1, 2011. XBRL UK has developed the UK-IFRS Taxonomy used by roughly 400,000 accounts in 2010 (XBRL Planet, 2010).
Netherlands Taxonomy Project
Watched closely by the IRS is a project currently underway to further develop the Netherlands Taxonomy (NT). “The main objective is to reduce the administrative expenses of companies by implementing the electronic filing of financial, tax and statistical statements for all companies.” The project is lead by the Dutch government, and supported by XBRL International amongst other organizations. Conferences and training sessions are being organized by XBRL Netherlands and several accounting firms to ease the implementation (XBRL International, 2010).
Standard Business Reporting
The NT project is one of many projects under the Standard Business Reporting (SBR) approach, including government organizations standardization “of the information supply chain of organizations involved in healthcare, agriculture and education” (XBRL International, 2010). Several governments have spearheaded efforts to streamline the information gathering and sharing process. Amongst these governments are Australia, the Netherlands and China. SBR aims to reduce the redundancy in data gathering, and to facilitate more efficient analysis and oversight. Implementation of SBR requires an establishment of a national taxonomy (OECD, 2009).
Partners
While the IRS makes no mention of its plans for XBRL on its website, several organizations mention the United States government as a partner in the development of XBRL. In the Treasury Office of Inspector General Annual Plan for fiscal year 2011, the United States’ Treasury states that: “we plan to assess whether XBRL can offer Treasury improved business capabilities for managing its programs and operations” (Office of Inspector General Office of the Treasury, 2011).
The IRS is as a member country of the Organization of Economic Cooperation and Development (OECD). The OECD is an organization where governments work together on common interests and problems, and in 2002 the Tax XML Technical Committee was formed. They have worked to identify existing and developing standards appropriate for use by tax authorities and these include XBRL and XBRL GL (Lutes & Cohen).
Conclusion
The growing interest for XBRL around the world is clear indicator that the US—who has tax treaties with hundreds of countries—may soon find itself in a hurry to implement XBRL for tax reporting. While the IRS and the United States’ Treasury continues to be silent on the topic, the consensus amongst industry leaders is ‘when and not if.’ Many details remain to be sorted out: Should compliance be mandatory or voluntary? Which standard is most appropriate for use in tax compliance? And finally, how will the IRS fund the research, development, and eventual implementation of this standard? If the successes of the SEC and the FDIC are any indicator, the IRS will be the next to adopt XBRL.

Reference List
Lutes, T., & Cohen, E. E. (n.d.). XBRL in tax and government. Retrieved November 6, 2011 from Ezine Articles Web site: http://ezinearticles.com/?XBRL-in-Tax-Compliance&id=2847111
Hannon, N. J. (2006, February). Will the IRS be next to adopt XBRL? Retrieved October 8, 2011 from Strategic Finance Web site: http://www.imanet.org/PDFs/Public/SF/2006_02/02xbrl.pdf
Monterio, B. J. (2011, August). XBRL wake-up call. Retrieved October 11, 2011, from CalCPA Education Foundation Web site: http://www.calcpa.org/content/26490.aspx
OECD. (2009, July). Forum on tax administration: taxpayer services sub-group guidance note standard business reporting. Retrieved November 6, 2011 from OECD Web site: http://www.oecd.org/dataoecd/36/52/43384923.pdf Office of Inspector General Office of the Treasury. (2011). Annual plan fiscal year 2011. Retrieved November 6, 2011 from U.S Treasury Web site: http://www.treasury.gov/about/organizational-structure/ig/Documents/Annual Plan for Fiscal Year 2011.pdf
Phillips, M. E., Bahmanziari, T. E., & Colvard, R. G. (2008, February). Six steps to XBRL. Retrieved October 11, 2011 from Journal of Accountance Web site: http://www.journalofaccountancy.com/Issues/2008/Feb/SixStepstoXBRL.htm
Roytman, M. (2009, September 17). XBRL in tax compliance. Retrieved October 11, 2011 from Ezine Aritcles Web site: http://ezinearticles.com/?XBRL-in-Tax-Compliance&id=2847111
U.S. Securities and Exchange Commission. (2011, September 09). XBRL.sec.gov. Retrieved October 11, 2011, from U.S. Securities and Exchange Commission Web site: http://xbrl.sec.gov/
XBRL Educational Resource Center at Bryant Univeristy. (2008). Why will financial professional use XBRL? Retrieved October 11, 2011 from XBRL Educational Resource Center at Bryant Univeristy Web site: http://xbrleducation.com/edu/finpro.htm
XBRL International. (2010, April 02). Netherlands. Retrieved October 8, 2011, from XBRL International Web site: http://xbrlplanet.org/wp/?page_id=395
XBRL International. (n.d.). Global ledger taxonomy - an introduction. Retrieved October 11, 2011, from XBRL International Web site: http://www.xbrl.org/GLTaxonomy
XBRL Planet. (2010, July 25). United Kingdom: HMRC filing requirements in iXBRL. Retrieved November 6, 2011, from XBRL Planet Web site: http://xbrlplanet.org/wp/?tag=united-kingdom XBRL US Inc. (2011). XBRL.US. Retrieved October 8, 2011, from XBRL US Web site: http://xbrl.us/Learn/Pages/FactSheet.aspx