The Internal Revenue Service recently has released its final version of Schedule UTP, Uncertain Tax Positions Statement. Missing are major reporting requirements contained in the agency's original proposal, Announcement 2010-9.
The agency's action reflects the volume, in both quantity and tone, of negative comments that followed publication of the original proposal in January.
The draft proposal required companies with assets of more than $10 million 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
- the maximum amount of potential federal tax liability attributable to these positions
- in addition to those positions for which a tax reserve must be established under FIN 48, Accounting for Uncertain Tax Positions, . . . uncertain tax positions will include any position related . . . to any income tax liability for which a taxpayer or a related entity has not recorded a tax reserve because (i) the taxpayer expects to litigate the position, or (ii) the taxpayer has determined that the Service has a general administrative practice not to examine the position.
Most of these requirements have been eliminated from the final Schedule UTP, and the IRS has given additional guidance which it asserts is consistent with its policy of restraint.
Reaction to the original proposal was immediate and fierce. The IRS’s claim that its new approach to reporting uncertain tax positions would result in greater transparency and efficiency was met with unusually candid comments.
At a Webcast with Ernst & Young LLP professionals in February, Heather Maloy, IRS commissioner – Large and Mid-Size Business Division, said the disclosure requirement had triggered such comments as:
- "You want us to do your work for you!"
- "How do you know this will result in efficiency?"
- "Will the list be the starting point of an audit and then we just negotiate from there?"
In Deloitte’s article, Uncertain Tax Positions and the IRS Transparency Initiative No Holds Barred, the firm criticized the IRS’s proposal for the amount of work it would take to complete the analysis and schedule, and the potential implications for state income tax filing requirements. It stated that another "more prevalent concern is whether the initiative would ultimately increase the IRS’s access to tax accrual workpapers."
In its comments, the American Institute of Certified Public Accountants (AICPA) cited the burden to smaller companies of the new reporting requirements and the potential for duplicative reporting, according to the Journal of Accountancy. The final schedule reflects some of the institute's concerns.
In prepared remarks delivered to theAmerican Bar Association in Toronto last month, IRS Commissioner Doug Shulman discussed the comments, first as they affected changes to the reporting requirements and, second, as they reflected broader concerns of how the proposal impacted privilege and the IRS’s long standing policy of restraint.
The final Schedule UTP now calls for a phased-in approach to the requirement to file the Schedule UTP. Corporations with total assets equal to or exceeding $100 million must file in 2010, but companies with assets of $50 million or more will not begin reporting until the 2012 tax year. Smaller companies, with assets of $10 million or more, will be required to report in the 2014 tax year.
Reporting requirements that are eliminated:
- The maximum potential tax liability – the final Schedule UTP requires a filer to rank its UTP’s from highest to lowest based on the size of the position. Taxpayers will use U.S. federal income tax reserve amounts to rank the positions on the schedule, but will not be asked to provide reserve amounts anywhere on the schedule.
- Administrative practice tax positions – but will, however, require reporting of the "expect to litigate" category.
- Rationale and discussion of the nature of the uncertainty to be part of the concise description of the uncertain tax position.
IRS announcement on policy of restraint and access to workpapers
Comments concerning how the original proposal impacted privilege and the IRS’s long-standing policy of restraint arose principally from the requirement to provide a rationale for the position, and a discussion of the nature of the uncertainty in the concise description, Shulman stated. These are no longer required.
The Deloitte commentary had observed that",Requiring the rationale for the position and the reasons for determining that it is uncertain could require taxpayers to divulge their subjective evaluations and assessment of the positions. This appears contradictory to the IRS’s characterization of the UTP proposal as not changing the policy of restraint with respect to tax accrual workpapers."
Many commentators noted, according to the Journal of Accountancy, that the disclosures required by the concise description are not required by FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes.
With Announcement 2010-76, which was issued at the same time as the revised Schedule UTP, the IRS states that it is expanding its policy of restraint in connection with its decision to require certain corporations to file Schedule UTP, and that the Service will forgo seeking particular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.
The IRS states that the taxpayer may edit the following information from any copies of tax reconciliation workpapers relating to the preparation of Schedule UTP it is asked to produce during an examination:
- working drafts, revisions, or comments concerning the concise description of tax positions reported on Schedule UTP;
- the amount of any reserve related to a tax position reported on Schedule UTP; and
- computations determining the ranking of tax positions to be reported on Schedule UTP or the designation of a tax position as a major tax position.
The AICPA acknowledged the changes made by the IRS in an article in the Journal of Accountancy,but stated that it continues to have concerns about reporting for uncertain tax positions because of:
- the burden this will place on smaller taxpayers when it is fully phased in in 2014 because the threshold was not increased;
- the potential burden this may place in future years on pass-through entities and tax-exempt organizations;
- duplicative reporting and the ultimate benefit to the government of the information received.