As you may be aware, FIN No. 48, Uncertainty in Income Taxes, is effective for non-public and non-profit organizations for calendar year 2010. After conducting several recent seminars and discussing FIN No. 48 with numerous preparers of GAAP basis financial statements, I’m surprised at the “ho-hum” attitude about applying this pronouncement.
In a nutshell, FIN No. 48 requires consideration of all more-likely-than-not tax positions in an organization’s tax returns for all open years that have a less than 100% likelihood of sustainability when audited by an IRS agent having knowledge of all relevant facts. By definition, tax positions also include failure to file any required returns for federal payroll and income taxes, as well as all applicable taxes and assessments in other taxing jurisdictions. A reporting entity consolidating other reporting units is responsible for uncertain tax positions in all such units, including pass-through and non-profit organizations.
A partner in a smaller CPA firm shared recently that, after completing a checklist guiding the application of FIN No. 48 for several of his audit clients, he discovered several key issues. First, questions on the checklist required compliance with the exact wording of the IRC and regulations. The preparer’s judgments, or the materiality of the effects of requirements, were not factors in determining compliance.
A second common issue that surfaced in this partner’s application of a FIN No. 48 checklist was that compliance with some IRC and regulations’ requirements was not complete. A common example was the required approval of an accountable reimbursement plan. Applicable regulations require persons charged with governance to approve a plan that includes the components prescribed by the regulations. One of the CPA’s clients had not obtained the required approval and their plan, therefore, would be ruled a non-accountable reimbursement plan. This, of course, would trigger penalties and interest for not including reimbursements as compensation on W-2 or 1099 Forms and, under FIN No. 48, an adjusting journal entry for the tax liability would be required.
Some reporting entities and their auditors have begun to consider alternatives to compliance with FIN No. 48 and other complex GAAP requirements.
1. Determine the materiality of the effects of a pronouncement. If the effects are not material, no application is necessary. For FIN No. 48, it would be appropriate to include this wording in Note A regarding income taxes: “Management has made a review for uncertain tax positions as required by FIN No. 48 and none were found.” Similar statements would be appropriate disclosure for other significant pronouncements that have immaterial affects on the financial statements.
2. If the effects of FIN No. 48 are material and management decides not to comply with its requirements, a departure from GAAP paragraph would be required in the auditor’s report. When management and the users of the financial statements agree to this alternative, it may be the most cost-efficient audit approach.
3. Management may decide to utilize an other comprehensive basis of accounting (OCBOA). While disclosure of circumstances related to certain GAAP applications may be necessary to prevent OCBOA financial statements from becoming misleading, compliance with detailed measurements and disclosures is not required when an OCBOA is used as the reporting framework.
Whatever the decisions made by management and auditors, the time to consider FIN No. 48 compliance and the other alternatives above is well in advance of an entity’s reporting date. For calendar yearends, that’s probably right now!
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