IRS has released its finalized (and revised) Schedule UTP for reporting Uncertain Tax Positions

For those working in the corporate tax arena, you probably remember the controversy surrounding the IRS's January 2010 announcement of their plan to create a new tax form to disclose a taxpayer's "uncertain tax positions" (see http://tax-fishing-and-other.blogspot.com/2010/02/uncertain-tax-positions-policy-of.html).

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!

Links:

• IRS Announcement 2010-75
• IRS Announcement 2010-76
• Schedule UTP - Uncertain Tax Position Statement
• Schedule UTP - Instructions
• IRS internal directive regarding UTP reporting
• Notice of Proposed Rulemaking (REG-119046-10) at page 415 of the document.
• AICPA article (extensive coverage)

IRS Announcement 2010-30 re disclosure of Uncertain Tax Positions (UTPs)

Just received the following advance release of Announcement 2010-30:

Announcement 2010-30 releases the draft schedule, Schedule UTP, accompanied by draft instructions that provide a further explanation of the Service’s proposal requiring reporting of uncertain tax positions, and invites public comment on the draft schedule and instructions.

Announcement 2010-30 will be in IRB 2010-19, dated May 10, 2010.

The advance is available at http://bit.ly/dn4Ubm but does not include a copy of proposed "Schedule UTP."

EDIT 4/20/10:

The IRS has now uploaded Schedule UTP  http://bit.ly/dugHbf and the instructions http://bit.ly/aHZ7Kn

Uncertain Tax Positions - Policy of Restraint?

On January 26, 2010, the IRS released an advance copy of Announcement 2010-9 stating its intention to require certain business taxpayers to disclose their "uncertain tax positions" ("UTPs") on their income tax returns. This Announcement (and the IRS's reasoning behind it) was first revealed to the public on that same day as part of IRS Commissioner Doug Shulman's remarks to the New York State Bar Association Taxation Section's Annual Meeting.

While it may not be immediately obvious, the implications are huge.

BACKGROUND
In 2006, the Financial Accounting Standards Board ("FASB") issued its Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006. FIN 48 was intended to address the matter of uncertainty in a company's income tax positions in the context of the tax provision reflected in its financial statements (under FASB Statement No. 109, Accounting for Income Taxes).

More specifically, FIN 48 required companies to meet a set of two "more likely than not" (i.e., more than 50%) standards in determining whether they could recognize (for financial statement purposes) the tax benefit from any particular non-routine income tax position. In addition, it imposed new disclosure requirements on affected companies who would then have to report information about their UTPs in their financial statement footnotes.

Not surprisingly, many commentators expressed concern that this new requirement (particularly the footnote disclosures) would inappropriately provide tax authorities with a roadmap in auditing a company's tax returns. The Board responded, in part, by stating that (1) requiring disclosures at the specified aggregate level would not reveal information about a taxpayer's individual tax positions while at the same time providing information that financial statement users would find useful and (2) the FASB was aware that the IRS had recently instituted a detailed reconciliation requirement that provides information about differences between amounts reported in an enterprise s income tax return and its financial statements (i.e., federal form M-3). It went on to state that the FASB believed that this reconciliation requirement and those like it are the sources of information that taxing authorities use to focus their examination. In other words, the FASB didn't believe that such FIN 48 disclosures would end up serving as a roadmap to the taxing authorities. (Note: FIN 48 was subsequently made a part of FASB Accounting Standards Codification (ASC) 740-10, Income Taxes.)

THE ANNOUNCEMENT
Contrary to the FASB's expressed belief, the IRS is now seriously considering not only using that roadmap, but asking affected taxpayers to add signposts and neon signs to that roadmap to light the way!

In its Announcement, the IRS starts off with the following statement:

"The Internal Revenue Service is considering changes to reporting requirements regarding certain business taxpayers uncertain tax positions in order to improve tax compliance and administration. The Service is developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns. This Announcement discusses the potential content of such a schedule and invites public comment on the Service s proposed approach. The schedule will require the annual disclosure of uncertain tax positions in the form of a concise description of those positions and information about their magnitude. The proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts, even though the Service can compel the production of this information through a summons."

WHAT INFORMATION IS THE IRS CONTEMPLATING?
The Announcement provides that the IRS is currently contemplating that affected taxpayers will be required to provide the following information regarding each of their UTPs:

• The Internal Revenue Code sections potentially implicated by the position;
• A description of the taxable year or years to which the position relates;
• A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
• A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
• A statement whether the position involves a determination of the value of any property or right;
• A statement whether the position involves a computation of basis; and
• Specification for each UTP, the entire amount of U.S. federal income tax that would be due if the position were disallowed in its entirety on audit. This amount is the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction, or credit if the position is not sustained. 

Interestingly, while many practitioners and taxpayers would arguably view the above as troublesome (to say the least), Commissioner Shulman went on to say that "We could have asked for more a lot more but chose not to. We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions." Whether we agree or disagree with his comments (or the IRS's intentions in general on this matter), there is little question that the IRS will rely heavily on this disclosure in both selecting companies for examination and in carrying out those audits.

WHO WOULD THE IRS BE TARGETING?
As currently proposed, the new requirement would apply to business taxpayers with over $10 million in total assets if they have one or more UTPs of the type required to be reported on the contemplated schedule. According to the IRS, this "includes a taxpayer who prepares financial statements, or is included in the financial statements of a related entity that prepares financial statements, if that taxpayer or related entity determines its United States federal income tax reserves under FIN 48, or other accounting standards relating to uncertain tax positions involving United States federal income tax."

As written, the scope of this planned disclosure requirement would be fairly broad and will undoubtedly increase the compliance burden on many affected taxpayers.

HOW COMMITTED IS THE IRS TO THIS INTIATIVE?
Based on my reading of the Announcement, Commissioner Shulman's comments, and the state of the federal budget, it's probably fair to say that they are very committed to it. In addition, the Announcement itself states that the IRS intends to publish the new schedule as quickly as possible and will mandate its use for returns filed after its release. Nevertheless, they have requested comments by March 29, 2010.


Clearly, the new requirements could have very significant reporting implications. As this issue is very new and could have substantial changes be sure to keep an ear open for additional information on this important topic.


If you would like to read the entire Announcement, it is available on the IRS website at http://www.irs.gov/pub/irs-drop/a-10-09.pdf