We have all been hearing about the dreaded FIN 48 - FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) for many years. FIN 48 was originally supposed to go into effect for years beginning after Dec. 15, 2006, but FASB recognized the difficulty of nonpublic company compliance and put off the effective date for one year. The concern was that many nonpublic entities and their CPA practitioners were not fully aware of FIN 48’s implications and had not had the necessary time to understand and apply FIN 48 before its effective date. These concerns continued into 2008 and the effective date was deferred until fiscal years beginning after Dec. 15, 2008 (that is, until 2009 for calendar-year companies). Unfortunately that time has come and there are no more extensions.
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Being in public accounting, I had heard about FIN 48 for years. So I decided to take a seminar on the subject to get a handle on what I was going to be dealing with. I remember taking a seminar in Fairfield, NJ with an associate and sitting through this seminar and thinking to myself, they have got to be kidding. They want practitioners to identify tax positions taken on a tax return that “more likely than not would not be sustained in an audit. “ The term tax position includes: a decision not to file a return, an allocation or a shift of income between jurisdictions, the characterization of income or a decision to exclude reporting taxable income in a tax year. Additionally, probability models, which are hypothetical, have to be used to determine the criteria more likely than not. You have to first make the assumption that the client is getting audited and then you have to determine whether or not this position could be sustained. At the time I took the seminar, the instructor indicated that practitioners were requesting that these workpapers have client/accountant privacy privileges. Practitioners didn’t want an IRS agent coming in and requesting the workpapers, the road map to questionable positions. At that time, she felt they were going to be protected. I thought to myself, this isn’t going to hold up; they are not going to be protected. Boy was I right. Not only are they not protected but now there is a proposal by the IRS to require taxpayers with over $10m in assets to attach a Schedule UTP to the return. This schedule would require providing the uncertain tax positions identified in the financial statements.
This puts practitioners in a real predicament. Try to explain this full blown “hypothetical” analysis to your clients. Due to economic conditions, clients are putting a lot of pressure on us to lower fees. Engagements have been scaled down from audits to reviews and many clients are having cash flow issues and are taking longer to pay. A FIN 48 analysis could be a very expensive endeavor. I was recently speaking with a tax director at one of the big four firms and he said their approach was to take the first page of the company’s tax return and analyze each line item. Identify revenue recognition policies, inventory costing methods, bad debt write-off policies, etc… My clients tend to file in multiple states and part of the analysis would be to identify states that aren’t being filed in and determine if there is some exposure. If a client has international operations, you have to determine if transfer pricing policies have been reviewed and updated appropriately. Once you have identified questionable positions, you then have to determine the federal tax liability and any associated interest and penalties. Don’t forget about the states. You have to do this calculation for the states also. I feel the cost of implementing FIN 48 is an undue financial burden to clients and practitioners are going to be put in the middle. We are required to do the analysis and have to explain to our clients the necessity. For me, it’s hard to inform my clients of the requirement to do this when I don’t feel it is bringing them any real value. I feel the timing of the implementation couldn’t come at a worse time. Clients are trying to cut costs to keep their doors open and compliance costs are going to go through the roof. Someone should have considered small to medium size businesses when this was being drafted. Unfortunately, they are going to suffer the brunt of FIN 48.