IRS Finalizes Regulations Requiring Corporations to file Uncertain Tax Position Statements

Jan 04, 2011   

IRS Finalizes Regulations Requiring Corporations to file Uncertain Tax Position Statements

On December 15, 2010, the Internal Revenue Service (IRS) issued final regulations requiring certain corporations with both uncertain tax positions and assets equal to or exceeding $10 million to fill out a Schedule Uncertain Tax Position (UTP).  Requirement of a Statement Disclosing Uncertain Tax Positions, 75 Fed. Reg. 240, 78,160 (December 15, 2010) (to be codified at Treas. Reg. §1.6012-2).  The schedule UTP is currently available on the IRS’s website.

These uncertain tax positions are identified by corporations during the process of preparing financial statements under applicable accounting standards. Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010).  Consequently, this regulation only affects taxpayers that are required to issue audited financial statements and does not affect smaller entities that rarely prepare audited financial statements. 75 Fed. Reg. 240 at 78,160.

For the 2010 tax year, this requirement is only applicable to those corporations meeting the above mentioned requirements that will be filling out one of the following tax returns:

– Form 1120, U.S. Corporation Income Tax Return;
– Form 1120L, U.S. Life Insurance Company Income Tax Return;
– Form 1120PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
– Form 1120F, U.S. Income Tax Return of a Foreign Corporation.

An issue raised by one commentator during the comment period was whether Schedule UTP required the disclosure of privileged information.  The IRS addressed this comment by stating:  

Provisions relating to the assertion of privilege are not included in this regulation, since it does not affect the existence of any applicable privileges taxpayers may have concerning information requested by a return or how they may assert those privileges.  

Id.

In this reply, the IRS seems to imply that the information required on Schedule UTP is not information protected by any privileges. 

Note, however, in Announcement 2010-76 of Internal Revenue Bulletin 2010-41, the IRS indicated that it would “forgo seeking particular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.” Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010). 

These “particular documents” likely include those at issue in U.S. v. Deloitte, 610 F.3d 129 (D.C. Cir. 2010) and Textron v. U.S., 577 F.3d 21 (1st Cir. 2009).  Both cases dealt with documents prepared by taxpayer corporations as part of an audit process which the taxpayer corporations argued were protected as work product. We previously discussed these cases at length here.

In both cases, in addition to arguing that the documents at issue were not prepared “in anticipation of litigation,” the IRS also argued that when the taxpayer corporations showed the documents to the independent auditors that were reviewing their financial statements, the taxpayer corporation had waived the protection of these documents as work product. 

Significantly, in Announcement 2010-76 of Internal Revenue Bulletin 2010-41, the IRS agreed “not to assert that privilege has been waived by such disclosure” but listed numerous exceptions to their “policy of restraint.” Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010). 

The IRS has provided itself with a means to obtain additional information with the regulations requiring the Schedule UTP.  The IRS has not, however, provided an answer to the question regarding the impact of these regulations on protections, such as privileges and work product, which are afforded to parties in litigation to ensure maintenance of an adversary system.  We previously reported IRS Chief Counsel William Wilkins’s reassurances regarding the IRS’s intention to comply with the attorney client privilege.  Notably, however, the IRS does not seem to express the same intention in the published final regulation.  The IRS avoided the question of “privilege” when it published its final rule with the blanket assertion that the information disclosed on the Schedule UTP will not consist of privileged information. The IRS provides no means by which taxpayers subject to the Schedule UTP can assert applicable privileges. 

Additionally, the UTP itself is likely a “required disclosure” under the Financial Accounting Standards Board’s (FASB) proposed standards on loss contingency disclosures.  Previously in our blog, Mitchell Fuerst commented on the proposed FASB standards, which standing alone are likely to result in a violation of the attorney client privilege.  The disclosure requirements imposed by the Schedule UTP reflect an additional attempt by a government agency to violate the traditional rules of litigation. 

If you have any questions regarding Schedule UTP or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.