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

Health Care Act - Dead, Alive, or ?

As just about everyone's heard by now, the fate of the controversial Health Care legislation just became even more complicated by Scott Brown's win in Massachusetts.  And while I don't remember who said it first, the following line is fairly apropos:  Around and around it goes. Where it stops, nobody knows.


I guess that means the write-up will just have to wait...

Affordable Health Care for America Act

As we wait for Senate action on their version of this controversial legislation, and try to digest the pundits’ opposing views on the subject, it’s probably a good time to take a brief look at a few of the more broadly-applicable tax provisions (as well as a few of the non-tax ones) and see what this proposed legislation really says.

If you’re looking for the full 1990-page proposed law and corresponding Congressional actions, you can access it through the Library of Congress website at the following URL:

• http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.R.3962:

(Full disclosure: Much of the following was taken from the JCT's technical explanation of the House bill. The original JCT document is available here.)

So without further ado, here is a quick synopsis on the House version of the bill:


I. Directly Tax-Related

A. Tax on Individuals Without Acceptable Health Care Coverage – Would generally impose a tax on such individuals equal to the lesser of (a) the national average premium for coverage for the taxable year, as determined by the Secretary of Treasury in coordination with the Health Choices Commissioner, or (b) 2.5% of the excess of the taxpayer’s modified adjusted gross income for the taxable year over the threshold amount of income required for income tax return filing for that taxpayer. This tax would be in addition to both the regular income tax and the alternative minimum tax and would only apply to US citizens and resident aliens, except if it would give rise to a hardship for the affected person(s). This provision would be effective for taxable years beginning after December 31, 2012.

Introduction / Worker, Homeownership, and Business Assistance Act of 2009

Before I launch into my first blog entry, allow me to introduce myself and offer a confession: My name is Andrew Gantman, I'm a tax partner at SingerLewak LLP, and I *love* the field of taxation.

While admittedly "geeky," there's something really gratifying about finding an obscure gem in a case, legislative history, or unusual set of facts that allows a client an unexpected benefit. Or working with an IRS examiner to demonstrate why a client is correctly reporting a particular item in a later tax year.

On that note, let's get started!


While everyone's been obsessing over the 1990-page Health Care bill that just passed the House of Representatives (but faces an uncertain future in the Senate), President Obama on November 6 signed the Worker, Homeownership, and Business Assistance Act of 2009 into law.

A few of the more widely (and currently) applicable provisions are as follows:

EXTENSION AND MODIFICATION OF FIRST-TIME HOME BUYER CREDIT

Extension (Effective for purchases after November 30, 2009)

Extends the credit available to first-time home buyers providing a refundable federal income tax credit equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10% of the purchase price of a qualifying principal residence on or after April 9, 2008, and before December 1, 2009. The credit phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase, and also contains certain recapture provisions upon later disposition of the residence.

The new law generally extends this credit to apply to a principal residence purchased before May 1, 2010. The credit also applies to the purchase of a principal residence before July 1, 2010 by any taxpayer who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010.