IRS Set to Roll Out Uncertain Tax Positions Schedule

By Benson S. Goldstein, J.D.

The AICPA and others have significant concerns about the scope and direction of the IRS’s quest to roll out Schedule UTP, Uncertain Tax Position Statement, for tax year 2010. According to the IRS, certain taxpayers with total assets equal to or greater than $10 million will be required to disclose their uncertain tax positions on Schedule UTP (REG-119046-10). These taxpayers include business entities that file Form 1120, U.S. Corporation Income Tax Return; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120-L, Life Insurance Company Income Tax Return; or Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return.

Despite the serious concerns raised by CPAs, attorneys, and business taxpayers about the proposed uncertain tax position (UTP) program, the IRS remains committed to its current schedule for rolling out Schedule UTP. In September, the IRS issued proposed regulations that would require the use of Schedule UTP for tax years beginning after December 15, 2009, and ending after the date the final regulations are published in the Federal Register (REG-119046-10). The IRS has not released any final details of the UTP program beyond these proposed regulations, but it is conceivable that it will have made such details public by the time this column is published. The purpose of this item is to remind AICPA members about an extremely important issue, one that will have a very significant impact on the income tax returns of a critical segment of the U.S. economy.

The IRS announced the proposed UTP initiative in a series of public releases—Announcements 2010-9, 2010-17, and 2010-30. These announcements should be viewed as the IRS’s articulation of the UTP initiative in its “proposal” stage; the program’s final details are imminent. Announcement 2010-9 states that Schedule UTP will require:

  • A concise description of each UTP for which the taxpayer or related entity has recorded a reserve in its financial statements; and
  • The maximum amount of potential federal tax liability attributable to each UTP, determined without taking into account the taxpayer’s assessment of its likelihood of prevailing or winning on the merits of the issue.

Announcement 2010-9 states that a UTP includes a position for which a tax reserve must be established under FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes, or other accounting standards. In addition, a UTP includes any position relating to a federal income tax liability for which a taxpayer or related entity has not recorded a tax reserve where the taxpayer (1) expects to litigate the position or (2) has determined that the IRS has a general administrative practice not to examine the position.

The cover letter (dated June 1, 2010) accompanying the AICPA’s UTP comments stated that “[t]he AICPA understands and supports the IRS objective of increasing the certainty, consistency and efficiency of the tax compliance process. We believe, however, that the procedures as outlined [by the IRS] . . . could significantly impede rather than enhance the goals articulated by the IRS.”

One of the AICPA’s major concerns about the UTP proposal is that the initiative could potentially undercut the integrity of the financial statement process. The AICPA has also pointed out that the proposal will likely impose an increased burden and cost on taxpayers that could be highly disproportionate to any benefits to the IRS. The AICPA further views the UTP proposal as creating new tension among taxpayers, tax advisers, and the IRS while altering the current self-assessment process. In addition, the institute is concerned that the UTP initiative will disproportionately affect small businesses and that it calls for taxpayer reporting at a higher level than mandated by Congress.

Instead of imposing a new disclosure process as provided for under the UTP proposal, the AICPA urged the IRS to focus its immediate attention and resources on improving the use and management of the large volume of disclosed information it already receives from taxpayers. It is the AICPA’s position, as described in its June letter, that taxpayers should be confident that the “IRS will be at least as diligent in analyzing and utilizing the disclosed data as taxpayers are in developing and reporting it.”

While the June comments suggested that the IRS should withdraw or substantially revise its UTP proposal, the AICPA offered constructive recommendations as to how the IRS could reduce the burden for taxpayers and make the proposal more workable. It recommended that the IRS create a pilot UTP program initially and reserve judgment on expansion until the results of the program have been thoroughly evaluated. In addition, based on the belief that the proposal will have a disproportionate impact on small businesses, the AICPA recommended a significant increase in the $10 million asset threshold described above. It suggested that only taxpayers with total assets in excess of $50 million and annual gross receipts in excess of $100 million be subject to reporting uncertain tax positions. On a positive note, it commended the IRS for excluding passthrough and tax-exempt entities from any requirement to file the Schedule UTP for the 2010 tax year.

In addition to keeping the AICPA’s membership informed of the particulars of any final UTP program announced by the IRS for tax year 2010, the organization will continue to work with the IRS to address taxpayer concerns about burden, complexity, and uncertainty.

EditorNotes

Benson Goldstein is senior technical manager (taxation) at the American Institute of CPAs in Washington, DC, and is staff liaison to the AICPA’s IRS Practice and Procedures Committee. For more information about this column, contact Mr. Goldstein at bgoldstein@aicpa.org.

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