New Schedule UTP Finalizes Guidance on Uncertain Tax Positions and FASB Interpretation No. 48
On September 24, 2010, the Internal Revenue Service released the final version of Schedule UTP regarding “uncertain tax positions.” The new Schedule finalized the requirement that specified categories of corporate taxpayers include information as to UTPs as part of their tax return.
In announcing the new UTP rules, IRS Commissioner Douglas Shulman hailed “a principled and balanced approach” that will improve tax administration and “will provide significant benefits to taxpayers, including getting them earlier certainty while preserving important taxpayer protections and respecting the important relationships the taxpayer has with its tax advisors and independent auditors.”
Generally speaking, a UTP is any federal income tax position for which a tax reserve has been established in an audited financial statement. UTPs usually are identified while preparing financial statements under applicable accounting standards, such as Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
Companies affected by the new rules are those corporations filing Form 1120, 1120-F, 1120-L or 1120-PC, which issued audited financial statements and recorded a reserve for one or more U.S. tax positions.
Under the new rules and as described in guidance documents that were released simultaneously:
- Reporting of UTPs will be phased in over five years depending on a companys size:
Corporate Assets First Year to File Schedule UTP $100 million or greater 2010 Tax Year $50 million or greater 2012 Tax Year $10 million or greater 2014 Tax Year
- The maximum potential exposure related to a UTP does not have to be disclosed. Instead, the taxpayer must rank its UTPs based on its size of financial accounting reserves. The taxpayer must also indicate which UTPs are “major”; i.e., when reserves are greater than 10% of the aggregate reported reserves.
- Taxpayers do not have to disclose the rationale and nature of uncertainty in the concise description of the position. This reconciles UTP disclosures with existing rules (e.g., Form 8275 for disclosure under section 6662). It also protects attorney-client privilege for any legal advice that taxpayers received in planning for a transaction.
- Taxpayers also do not have to report “Administrative Practice” positions; i.e., those items omitted from tax reserves because “the corporation determined it was the Service’s administrative practice not to raise the issue during an examination.
- Disclosures on Schedule UTP should be made in a manner consistent with the decisions involved in establishing tax reserves for financial accounting, including pertinent certainty and materiality standards. Under applicable accounting standards, however, taxpayers must disclose positions for which it did not establish a reserve because of an intention to litigate, if challenged.
In addition to the above-described Schedule UTP guidance, the IRS also issued Announcement 2010-76, which expands the Services “policy of restraint.” The IRS stated that it will not assert any waiver of attorney-client privilege (or the tax advice privilege of section 7525 or the work-product doctrine) in most cases in which a corporation turns over documents to an independent auditor as part of a formal audit program.
Contemporaneously, in a Directive to the Field, the agency instructed tax examiners to apply regular examination tools “without bias in favor of the government or the taxpayer” and to “apply the law as it currently exists, not how we would like it to be.” According to the Directive, “This is the key to meeting our mission of fair and balanced tax administration[.]”
With the announcement of Schedule UTP, corporations will now require greater attention to “ and legal advice on “ the proper disclosures on tax positions to be made, how to quantify positions for the required rank ordering, and what information should be provided (with an eye toward maintaining privilege).