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.

On October 26, 2010, the Taxpayer Advocate Service (“TAS”) announced that it will recommend in its annual report to Congress that the IRS change its mission statement to reflect its expanded role in administering benefit programs and to acknowledge that the IRS now will have two missions: revenue collection and administration of benefit programs.

The current IRS mission statement is direct and simple: “provide Americas taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.” The current mission statement was adopted in 1998 after the passage of the IRS Restructuring and Reform Act which mandated that the IRS review and restate its mission to place a great emphasis on serving the public and meeting taxpayers needs while still focusing primarily on revenue collection services.

Now, however, with the passage of the Patient Protection and Affordable Care Act (“PPACA”) the IRS will also be responsible for enforcing and monitoring compliance with the individual and employer health insurance mandates.

Under the PPACA, all Americans will be required to carry a minimum level of health insurance or pay a tax for every month they are without such coverage. It will be the responsibility of the IRS to monitor individuals and employers and to punish those who do not comply starting in 2014. Starting in 2014, individuals and businesses will be required to report to the IRS, on their tax returns, whether they have purchased or provided the required insurance and to disclose which months, if any, in which they failed to do so. Using this information, the IRS would determine whether the employer or individual qualified for an exception to the mandate or should be required to pay a separate tax which has a yearly maximum of $750 per person.

According to a Congressional Budget Report, in order to carry out its new duties, the IRS will need $10 billion in additional funds, none of which were provided for in the PPACA. The House Ways and Means Committee estimated that this additionally funding would allow the IRS to hire 16,500 new agents and personnel whose role it would be to monitor and enforce the new healthcare mandates. It is the need for these new employees and the lack of Congressional funding that is driving the TAS call for a new mission statement.

The TAS, an independent office within the IRS that assists taxpayers in resolving their problems with the Service and identifies and proposes changes to systemic problems that exist within the Service, hopes that with the acknowledgement of its new expanded mission, the IRS will receive the increased funding it needs to properly administer the mandates.

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.

Between the end of July and the beginning of November, the IRS reports that over 5,000 people and businesses “ predominantly certified public accountants (CPAs) “ have filed public comments in response to the proposed regulations that would regulate tax return preparers and amend rules governing practice before the IRS.

The IRS has proposed new regulations which are part of the preparer tax identification number (PTIN) system. This system permits tracking of work by all individuals involved in “significant tax decisions.” Under IRS Circular 230 (which enumerates the rules of practice before the Service), anyone who is not an attorney, certified public accountant, or enrolled agent is required to qualify as a registered tax return preparer. This applies to anyone involved in preparing documents that comprise a substantial part of tax returns “ such as the professional and clerical staff of a CPA.

In order to prepare tax returns after January 1, 2011, registered tax return preparers must register with the IRS and possess a PTIN. They are also required to pass a minimum competency examination when testing becomes available, probably beginning in mid 2011. Preparers who pass the exam also will be subject to suitability checks designed to uncover any past conduct that violates provisions of Circular 230. Once registered and accredited, registered tax return preparers have continuing professional education requirements similar to that of CPAs or enrolled agents.

In response to this regulatory initiative, the American Institute of Certified Public Accountants (AICPA) called on its members to blitz the IRS with public comments on the rules. The organization posted a sample email on its website that could be sent to the Service. Chief among the complaints about the new regulations is the PTIN requirement that is extended onto the non-signing tax-return preparers at CPA firms.

Edward Karl, AICPA vice president of taxation, testified before the IRS urging that the Service “exempt staff of CPA firms who prepare tax returns under the supervision of licensed CPAs from the proposed testing and continuing education requirements.” Karl noted that licensed CPAs already closely supervise the work of non-signing staff at firms and opined that such supervision, coupled with state monitoring of CPAs, was sufficient. He further assailed the “high costs and burdens of competency testing,” and suggested, “[t]he IRS should first evaluate whether the use of PTINs and extension of Circular 230 to all practitioners, combined with IRS tracking initiatives, is sufficient to address unethical and incompetent tax return preparation.”

A cursory review of the 5,783 public comments demonstrates that many CPAs have availed themselves to the AICPAs model email. Of the original work submitted to the IRS, however, the requirement that non-signing preparers must register is still the hot button issue. Many other CPAs opined that the extra costs to CPA firms for compliance would need to be passed long to their client taxpayers, which would force more taxpayers to do their own returns and actually increase errors and non-compliance “ results antithetical to the IRSs intentions.

It remains to be seen how the IRS will respond to this groundswell of opposition to their PTIN program.

Speaking before the American Institute of Certified Public Accountants (AICPA) on October 26, 2010, Commissioner Douglas H. Schulman announced the Internal Revenue Services (IRS) goals of “a sound, fair and efficient tax administration” and “improved compliance.” In implementing these goals, the IRS has adopted the “Return Preparer Initiative”, which Commissioner Schulman described as part of “an evolutionary change of getting smarter and working smarter.”

The purpose of the Initiative is to help taxpayers file accurate returns from the start. This avoids the difficult and time-consuming issues that arise when the IRS discovers inaccuracies on the taxpayers return. The Initiative targets the professional return preparer community to achieve these results. After pointing out that eight of every ten taxpayers use professional tax preparers when filing returns, Commissioner Schulman attributed inaccuracies in tax returns to the large amount of return preparers that are not subject to any professional oversight.

To ensure that return preparers are competent, the Initiative launched an online Preparer Tax Identification Number (PTIN) application, requiring all return preparers to be registered with the IRS. The IRS plans to use these applications to build a publicly accessible database that consumers can use to ensure their return preparers are qualified.

In addition to the registration requirement, the Initiative also seeks to impose testing and continuing education requirements for return preparers. As the Internal Revenue Code continues to become more complex, these requirements will help ensure that return preparers are aware of changes in the Code and are able to reflect these changes in the returns they prepare.

For the upcoming tax year, the online PTIN application appears to be the only requirement for return preparers. As the IRS has neither determined the start date for the testing requirement nor the effective date for continuing education, Commissioner Schulman stated the IRS intended to waive these requirements during the first year of implementation.

If you have any questions regarding the Return Preparer Initiative or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.