FASB Interpretation (FIN 48), Accounting for Uncertainty in Income Taxes, is intended to make tax treatment more consistent between companies by establishing recognition thresholds and measurement guidelines for tax positions on federal income tax returns and setting up new guidelines for income tax reserves. But as state legislators and tax authorities look to increase tax revenue and enforce corporate tax laws, they may take advantage of the transparency afforded by FIN 48 to take a closer look at corporate returns, says Phil Zinn, state and local practice leader at Pricewaterhousecoopers, according to CFO.com.
“Uncertain tax positions,” according to CPA Journal, include all areas of tax reporting, including whether to file a return, the allocation of income among jurisdictions, timing of income or deductions, and the inclusion or exclusion of income.
Two issues that state authorities might examine are tax nexus and temporary nexus. States view business activities that create nexus differently. Some require companies to combine the tax returns of similar business units, for example, which could trigger sales and use taxes, says David Dahn, a partner at Dahn and Leahy LLP. “Gone are the days of using a flat 5 percent state tax rate,” he says. “The driver for state taxation is apportionment, and determining what a company does to ultimately trigger nexus within a particular jurisdiction,” CFO.com reports.
While state taxing authorities rarely raise an issue of temporary nexus says Arthur Radin, managing partner of Radin Glass & Co. LLP, writing for CPA Journal, one possible result of the application of FIN 48 could be that a company that might never have filed a state return because of temporary nexus -- in the case of a chance sale by a salesperson, for example -- might have to consider filing to avoid carrying a potential liability for interest and penalties that would never disappear.
In addition, past restructuring projects could attract the attention of state tax authorities and should be reviewed in light of new state statutes, says John Zefi, director of state and local tax at BDO Seidman.
Other potential state and local complications could arise when companies face a new tax bill from one jurisdiction resulting from the disclosures required by FIN 48 that triggers a new tax deduction or credit in another jurisdiction, The Wall Street Journal reports.