New Clarification on UTP Disclosures from the IRS

Nov 08, 2010   

In the aftermath of the release of the final Schedule UTP, IRS officials have been offering clarifications on several key issues that are of great concern to taxpayers. Service officials have also stated that further guidance on filing Schedule UTP may come before the end of the year.

Speaking in San Diego on November 5th at the annual meeting of the California Tax Bar and California Tax Policy Conference, William J. Wilkins, IRS Chief Counsel, stated that tax practitioners must make concise disclosures of uncertain tax positions (UTPs) which are obligated to be disclosed. According to the instructions to Schedule UTP, a “concise description” should include a description of the facts material to the tax treatment of the position and information that reasonably can be expected to apprise the IRS of the identity of the tax position and the nature of the issue. While initial guidance indicated that the statement need not be more than a few sentences and need not include an assessment of the hazards of a tax position or an analysis of the support for or against the tax position, officials caution that the disclosure must be concise and descriptive enough for the IRS to properly evaluate the position.

Wilkins further stated that tax practitioners should not over-analyze the information being provided on the Schedule.

Similar comments have come from other IRS officials speaking at other tax functions. At a November 4th meeting sponsored by the Tax Audits and Litigation Committee of the Tax Section of the D.C. Bar, Ronald Schultz, Senior Adviser to the Deputy Commissioner for Service and Enforcement stated that additional guidance on Schedule UTP may have to be issued before the end of the year to answer tax practitioner questions. Schultz further stated that the additional guidance most likely will not result in changes to the form, “What we put out was intended to be final.”

Schultz and Deborah Palacheck, a senior adviser in IRS’s Large Business and International Division, said that guidance may be required in four areas that are frequently the source of practitioner questions and comments:

  • “Recording a Reserve” “ Schedule UTP instructions provide a generic definition of what it means to record a reserve (a triggering event for disclosing the UTP) and, according to Schultz, intentionally steer clear of specificity. But questions keep arising, said Schultz, therefore the IRS is looking to see if additional guidance is necessary.
  • “Reserve Amounts and Ranking” “ Schultz stated that additional inquiries surround the reserve amount that must be reported and the requirement in the regulations to rank each tax position by size.
  • “Foreign Tax Positions” “ Although the IRS believes the instructions on the reporting of foreign tax positions are clear, Schultz stated that the IRS continues to get questions about foreign tax positions, so additional guidance may be warranted.
  • “Embedded Net Operating Loss Carryforwards” “ Schultz also noted that the Service is working to respond to numerous questions regarding net operating loss (NOL) carryforwards that are inherently embedded in uncertain tax positions. This very scenario was addressed in the instructions to the form, but tax practitioners still want further guidance.

The issue of overlapping disclosures “ such as the NOL carryforwards highlighted above “ are a focus of IRS discussions as the Service determines whether additional guidance is necessary. IRS Special Counsel Kathryn Zuba, the primary author of the official IRS guidance on Schedule UTP which has already been released, stated at a recent tax forum that “a complete and accurate disclosure of a tax position on the appropriate year’s Schedule UTP will be treated as if the corporation filed a Form 8275-R, Regulation Disclosure Statement, regarding the tax position.”

Zuba further stated that the Service will be looking at the Schedule M-3 for large and mid-sized businesses vis-à-vis the companies Schedule UTP disclosures to determine if any overlap can be eliminated.

The bottom line is that the IRS is continuing to tweak its guidance with respect to Schedule UTP, and more information will be forthcoming in the next two months.