Schedule UTP Disclosures Will Put New Companies in the Sights for an IRS Audit

Nov 15, 2010   

When the Internal Revenue Service proposed the new regulations on uncertain tax positions (UTP) several months ago, many taxpayers felt the hair on the back of their necks go up. In the days before the new Schedule UTP, when IRS auditors came to examine a business, it was a game of cat and mouse “ what did the company know that the auditors didnt, and what were the auditors really looking for? The fear with Schedule UTP was that the required disclosures under the new regs would provide a roadmap for auditors that would put businesses at a disadvantage versus the examiners.

At the time the UTP regulations were being proposed, the IRS said, “Nonsense!”

Speaking at a February 22, 2010 Ernst & Young Thought Center Webcast entitled “IRS Announcement 2010-9 Uncertain Tax Positions “ Policy of restraint: What you need to know,” Heather Maloy, IRS Commissioner for Large and Mid-Size Business Division, said that the Services primary goal was “to bring taxpayers into compliance and keep them there.” She added that the goal of Schedule UTP was not to somehow quantify risk for the reporting company, but to raise the level of governance and transparency. According to Maloy, “Tax risk should be considered in board rooms.”

She also downplayed the issue of Schedule UTP disclosures leading to a greater risk of audits. “Uncertain tax positions are not good or bad, just uncertain,” said Maloy. She added that the intention was not to match the uncertain tax positions with listed transactions; rather, the Service merely wants to learn about issues earlier in the process to achieve resolution before filing, if that were possible.

That was in February.

Speaking on October 26th at the American Institute of Certified Public Accountants Tax Division meeting, the same Heather Maloy indicated that the IRS now will use the disclosures from Schedule UTP as a method to identify taxpayers for audit that the Service may have traditionally ignored, as well as those companies already in the IRSs sights.

According to Maloy, the IRS will look at “what [Schedule UTP] brings us,” as the IRS tries to concentrate its resources and become more efficient in selecting taxpayers for audit. She promised that there will be a broad focus on uncertain tax positions noting that the new Schedule UTPs system for ranking positions “provides us the information we need.”

In a New York Times interview in August 2010, IRS Commission Douglas Shulman said that he hopes the thought of Schedule UTP disclosures would encourage companies to be forthcoming in seeking Service rulings before filing their returns or enrolling in the Compliance Assurance Program, which assigns auditors to work with major corporations to resolve tax questions in real time.

“A lot of corporations are playing it by the book,” Mr. Shulman said in the Times article. “The people who will most change their behavior are the people who play the audit game and try to hide things from us.”

It looks like a new game of cat and mouse is just beginning.

Let Fuerst Ittleman put its resources to work for you so that your companys risk of IRS audit is minimized to the extent possible. Whether it is new Schedule UTP disclosures or other traditional risk factors, our Tax Planning Practice can help you stay out of the sights of the IRS. Contact FI today.