As you probably also know, they followed that announcement with an advance copy in April of the proposed version of the form, and requested comments on it. (see http://tax-fishing-and-other.blogspot.com/2010/04/irs-announcement-2010-30-re-disclosure.html).
Well, just last Friday, the IRS released its revised and finalized version of Schedule UTP, along with explanatory Announcements 2010-75 and 2010-76.
First, the "good" news:
To their credit, the IRS made some significant changes to the April draft version of Schedule UTP in response to public comments. Key among these changes are:
- Five-year phase-in of the reporting requirement based on a corporation’s asset size - As originally proposed in January, the reporting requirement would apply to business taxpayers with total assets of at least $10 million. In April, the IRS announced that only certain corporations would be required to file the schedule. With their latest revision, 2010 Schedule UTP filings will generally only be required for corporations that issue (or are included in) audited financial statements and that have at least $100 million of assets. The asset threshold will be reduced to $50 million starting with 2012 tax years and down to $10 million starting with 2014 tax years. In addition, the IRS will consider whether to apply the UTP reporting rules to other taxpayers for 2011 or later years (e.g., for pass-through and/or tax-exempt entities).
- No longer being required to report the maximum tax adjustment amounts - While the April draft contemplated that the reporting corporation would disclose a maximum potential tax adjustment (i.e., the maximum US federal income tax liability for the tax position if not sustained upon IRS audit), the IRS ultimately removed this proposed requirement. It replaced this provision with a requirement for the reporting corporation to rank its UTPs by size (e.g., in descending order), as well as identify those positions that exceed 10% of the total reported positions. The size of the UTP is determined at the affiliated group level.
- No longer being required to report the rationale and nature of uncertainty in the concise description of the position - In response to commentators' concerns, including the fact that such disclosures are not required by FIN 48 (now known as FASB ASC 740-10), the instructions have limited the description of the UTP to "a concise description of the tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the Service of the identity of the tax position and the nature of the issue." In addition, the final instructions expressly provide that a corporation is not required to include an assessment of the hazards of a tax position or an analysis of the support for or against the tax position.
- No longer being required to report administrative practice tax positions - The finalized instructions eliminated the requirement in the April draft that required reporting corporations to disclose tax positions for which a reserve had not been recorded based on an expectation to litigate or an IRS administrative practice (i.e., the IRS had historically not challenged the position upon audit when dealing with that tax position re that taxpayer or similar taxpayers).
In addition, no change (or merely clarification) was made to the instructions to provide that:
- An affiliated group of corporations filing a consolidated return will file a single Schedule UTP for the affiliated group for each year.
- The affiliated group need not identify the member of the group to which the UTP relates.
- A complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP will be treated by the IRS as if the corporation filed a Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement) regarding the tax position. A separate Form 8275 or 8275-R need not be filed to avoid certain accuracy-related penalties with respect to that position.
- Whether a reserve has been recorded for Schedule UTP disclosure is determined by reference to those reserve decisions made by the corporation (or related party) for audited financial statement purposes. If it was determined that (under applicable accounting standards) either no reserve was required because it was either immaterial or sufficiently certain, then it need not be reported on the schedule.
- Schedule UTP requires the reporting of U.S. federal income tax positions but not foreign or state tax positions.
- Corporations report their own tax positions on Schedule UTP and do not report the tax positions of a related party.
- Tax positions taken in years before 2010 need not be reported in 2010 or a later year even if a reserve is recorded in audited financial statements issued in 2010 or later.
- Schedule UTP need not be filed for short tax years ending in 2010.
- Worldwide assets are used to determine whether a corporation that files a Form 1120-F (including a protective return) must file Schedule UTP.
- The definition of audited financial statement was revised such that an "audited financial statement" is one on which an independent auditor expresses an opinion and that compiled or reviewed financial statements are excluded from the definition of audited financial statement.
Next, the "bad" (or at least not "good") news:
- Schedule UTP isn't going away, and will apply to an increasing number of taxpayers as time goes on.
- There remain unanswered questions (e.g., issues related to the reporting of tax positions in the year in which a corporation is acquired or disposed of; the level or type of due diligence required to obtain reserve information from a related party or information from a pass-through entity relating to a corporation's uncertain tax position involving the pass-through entity; how penalties will be imposed for reporting failures).
- The Notice of Proposed Rulemaking ("NPRM") published on September 9 expressly authorizes the IRS to require filing of Schedule UTP, but is not expected to be finalized until some time before the end of the year. This authorization is established pursuant to new Prop. Treas. Reg. section 1.6012-2(a)(4) and (5).
As always, let me know if you have any questions or comments!
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