IRS addresses issues regarding disclosure of uncertain tax positions

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Heather Maloy, IRS commissioner, large and mid-size business division, joined Ernst & Young LLP professionals this week for a discussion of the IRS proposal to require disclosure of uncertain tax positions on a schedule that will be attached to corporate income tax returns.

During the Webcast, “IRS Announcement 2010-9 Uncertain Tax Positions – Policy of restraint: What you need to know,”Maloy sought to clarify the IRS’s goals in making this proposal and answer questions the IRS had received thus far. Panelists from Ernst & Young analyzed what may be required of companies going forward.

The schedule will require companies to provide a concise description of each uncertain tax position for which the taxpayer or a related entity has recorded a reserve in its financial statements, and the maximum amount of potential federal tax liability attributable to these positions.

The IRS’s primary goals, Maloy said, were “to bring taxpayers into compliance and keep them there,” to raise the level of governance, and increase transparency. “Tax risk should be considered in board rooms,” she said, adding that it was not the goal of the schedule to quantify risk.

Currently, 25 percent of audit time is consumed in issue identification, Maloy said, and it is taking a very long time to resolve audits. “We know we have to do things differently.”

Maloy and the panelists said the disclosure requirement had triggered comments, such as: “You want us to do your work for you!” “How do you know this will result in efficiency?” and “Will the list be the starting point of an audit and then we just negotiate from there?”

Maloy said she would welcome comments from attendees as long as they were not attached to something that was thrown at her.

Many of the questions from the audience and IRS feedback concerned information sharing, who this proposal applies to, effective date, possible exemptions, and penalties. Maloy gave the following answers to these questions at various points in the discussion and highlighted areas where the IRS was seeking additional comment.

Information sharing – The schedule will not result in information sharing outside of the normal channels with state and foreign governments.

Scope – Any entity that has a tax reserve for an uncertain position will be required to provide the information on the return. With regard to related parties, the goal is to obtain disclosure on the tax return regardless of what entity has taken the reserve. These disclosures could be combined in a single statement or entity by entity.

Effective date – The requirement will not apply to 2009 returns filed in 2010, but will apply to 2010 returns filed in 2011.

Penalties – The penalties that will apply are the normal penalties for incomplete schedules, although the IRS may ask Congress for specific penalties. Maloy asked for feedback on Disclosure Offer Penalty Protection and Section 6692 penalty rules for failure to timely comply with annual reporting requirements.

Rulings – “The meat will be in the form and instructions,” Maloy said. The IRS will seek comment on the form.


Implementation – Rob Hanson, Ernst & Young, Americas director of tax controversy and risk management services, asked whether the schedule will represent a catch-up in the first year or will it apply just to uncertain tax positions reflected in that year, and whether there will be retroactivity. Maloy said the IRS had not yet made a decision on these matters. Issues would arise about transactions that might affect not this year but later years’ returns. The IRS is anticipating a lot of dialogue on this matter, Maloy said.

Chester Abell, Ernst & Young, national director of tax accrual and IFRS tax services, addressed the implications for financial statement reporting. “Nothing has changed,” he said. Companies will still be auditing under the same standards – under U.S. generally accepted accounting principles (GAAP), IFRS (International Financial Reporting Standards), or local country generally accepted accounting principles.

FIN 48 analysis will be the starting point for determining the specific information required by the schedule, Abell said. The new schedule could lead to closer analysis of More Likely Than Not positions. “But if there is no reserve, there is no disclosure.”

The analysis will be a bit more precise. “You cannot answer in a general sense,” Abell said. “It is really a question of looking to the facts and circumstances. FIN 48 analysis is very taxpayer-specific.”

Hanson discussed the potential difficulty taxpayers might have in calculating the maximum exposure. The question arises of how this requirement applies to transfer pricing or valuation issues.

Many comments focused on the difficulty of getting to the materiality factor. Maloy said taxpayers should follow financial statement materiality – is there a reserve, does the company plan litigation with the expectation of success, or is the position normally accepted under IRS administrative practice?

Panelists also asked whether the requirements applied to pass-through entities and not-for-profits, which also are required to conduct FIN 48 analysis, and whether there would be exemptions. Maloy said that the IRS was looking into pass-through entities requirements and that the ruling would apply to income taxes but also possibly withholding taxes.

To the overriding question of how the proposal would lead to audit efficiency, Maloy answered that in a general sense – it was really important to resolve uncertainties. She pointed out that some of the IRS’s programs had brought about efficiencies, and they were continuing to evaluate programs. The Collections Appeals Program (CAP) and Industry Issue Resolution (IIR) process have been successful and the IRS was considering making them permanent. It also was looking at the tiered-issue process which had mixed to not-so-good reviews.

The IRS is not planning to expand the listed transactions, the most aggressive transactions. “Uncertain tax positions are not good or bad, just uncertain,” Maloy said. The intention was not to match the uncertain tax positions with listed transactions. The IRS wants to learn about issues earlier and get resolution before the tax return is filed, if possible.

A poll conducted during the Webcast found that 40 percent or more of attendees anticipated greater involvement by corporate boards in tax risk assessment as a result of the disclosure requirement for uncertain tax positions. Tax risk management would now become part of good corporate governance.

The two areas that concerned attendees the most were how to write the concise description of the uncertain tax position and how to quantify the exposure. Maloy said she was surprised to hear the concern about concise description, saying that she had not heard a lot of comments on that matter.

The IRS is looking for comments on technical issues and the mechanics, Maloy said. Comments are due by March 29, 2010, but the agency is considering an extension of the comment period. Information about suggested areas for comment and how to submit comments is included in Announcement 2010-9. The Ernst & Young Thought Center Webcast was moderated by David Helmer, Ernst & Young, Americas director of business tax services

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