The Sarbanes-Oxley Act brought the tax manager into the financial statement reporting process as never before. As SOX Section 404 internal control certifications were made with respect to each input into the financial statements, it became clear that one of the weakest areas for SOX 404 compliance was accounting for income taxes.Under FASB Statement No. 109, Accounting for Income Taxes, the process of providing for deferred income taxes had become so subjective and subject to differing interpretations that certification of the results was difficult, and comparability across financial statements appeared to be lacking.

At the same time, the Internal Revenue Service, in its attack on tax shelters, had started to increasingly focus on book/tax differences as a key area to look at in identifying abusive tax shelters. Schedule M-3 was developed on the tax side to force tax preparers to better document differences between the book and tax treatment of business activities and transactions.

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