May 06, 2010
The IRS on April 19 released new information (Announcement 2010-30) together with draft instructions and a tax return schedule for its initiative to require corporate taxpayers to report “uncertain tax positions” (UTPs) on their returns.
The initiative was first introduced in Announcement 2010-9 on February 16 and was followed with Announcement 2010-17 on March 29. While Announcement 2010-9 covered the broad outlines of the proposal, the new draft schedule and instructions clarify many of the proposed details, including:
- Effective date;
- Affected corporations; and
- Specific disclosure requirements
However, many unanswered questions remain, and the IRS is currently accepting comments through June 1, 2010.
Who is covered
The new requirements will apply to corporate taxpayers who have both uncertain positions and at least $10 million in assets (as reported on Form 1120) if they or a related party issue audited financial statements. For example, a domestic subsidiary of a foreign corporation may be required to disclose its uncertain tax positions if its foreign parent includes a reserve for the position in its financial statement.
Beginning with the 2010 tax year, the schedule is required for the following taxpayers:
- Corporations filing Form 1120
- Insurance companies filing Form 1120 L or Form 1120 PC
- Foreign corporations filing Form 1120 F
The guidance leaves open the possibility that the IRS will in future years require the schedule to be filed by other Form 1120 series filers such as real estate investment trusts and regulated investment companies, and possibly pass-through entities and tax-exempt organizations.
Positions that must be reported
The draft Schedule UTP will require covered corporations to report any federal income tax position for which a tax “reserve” has been established in an audited financial statement.
Under U.S. GAAP, this refers to reserves established under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48), which has been incorporated into Topic 740 of the Accounting Standards Codification (ASC 740).
The schedule will also require the reporting of positions in which a reserve was not recorded because the taxpayer either expects to litigate the position or has determined that the IRS has a general administrative practice not to examine it.
The reporting would apply to all current and prior-year positions taken at least 60 days before the tax return is filed (or positions in which the decision not to reserve was made at least 60 days before filing). However, a corporation is not required to report a prior-year tax position if it has already been reported on a prior-year schedule merely to reflect increases or decreases in the reserve.
There are transition rules for the first year of reporting: Corporations will not be required to report positions taken in a tax year beginning before December 15, 2009 or ending before January 1, 2010, regardless of when the reserve related to that position is established.
What must be reported
With respect to each uncertain tax position, the proposed schedule would require taxpayers to report:
- The primary Code sections (up to three) relating to the position;
- The maximum tax adjustment due if the position were disallowed in its entirety on audit (unless it is a valuation or transfer pricing position), including all
changes to items of income, gain, loss, deduction, or credit if the position is not sustained (but not penalties or interest);
- A ranking of the tax positions of all valuation and transfer pricing positions;
- Whether the tax position was reported because it was determined the IRS would not challenge it based on administrative practice;
- Whether the position involves a temporary difference (timing) or permanent difference or both;
- The employee identification number of any pass-through related to a tax position;
- The year of the tax position (for reporting past positions); and
- A concise description of the position.
The IRS said the concise description of the position should not exceed more than a few sentences, but should include information that can “reasonably be expected” to allow the IRS to identify the position and understand the uncertainty. The description must specifically include:
- Whether the position involves an item of income, gain, loss, deduction or credit against tax;
- Whether the position involves a determination of the value of any property or right; and
- The rationale for the position and the reasons for determining the position is uncertain.
The schedule would not require taxpayers to disclose their risk assessment or tax reserve amounts.
When it applies
The IRS intends to finalize the schedule and have it apply for 2010 Form 1120series filings. Relief from reporting prior-year positions is detailed above.
The IRS has reserved on the issue of penalties. IRS leadership has indicated it may ask Congress for new statutory penalties through legislation. It is not clear under the Internal Revenue Code’s existing penalty structure what penalties may be imposed or which the IRS may seek to impose for failure to disclose uncertain tax positions. However, the IRS considers the initiative to be an important new aspect of tax compliance. The potential application of penalties is an issue of significant concern.
The IRS has indicated that focusing on uncertain tax positions will enable it to identify issues of particular interest or significant magnitude more quickly and efficiently. The IRS may view increased disclosure requirements as providing increased incentive for businesses to participate in its various early issue resolution programs, with a focus on increasing currency in the exam cycle.
The disclosures will impact the extent to which businesses must document positions for financial and tax purposes. It likely will mean increased IRS scrutiny of tax positions, including increased demands for position documentation.
Connecting with your advisors
Grant Thornton LLP anticipates that businesses will be concerned about practical and strategic impacts of the policy change on both tax and financial reporting obligations. Evaluation of issues under the new requirements will call for increased understanding of applicable financial accounting and tax standards and stronger coordination of the application of those standards in both financial and tax reporting.
Regulatory changes, such as increased tax return preparer standards and the implementation of Sarbanes-Oxley in recent years, are reminders that tax and financial regulation and related policies change. Grant Thornton looks forward to helping businesses address the meaning and impact of the proposed policy on both tax and financial reporting matters.
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