IRS Plans to Require Disclosure of UncertainTax Positions

On January 26, the IRS announced it is considering making changes to how business taxpayers report uncertain tax positions (Announcement 2010-9). Specifically, the IRS said it is developing a schedule that certain businesses would be required to use to disclose uncertain tax positions on their returns annually. The IRS plans to implement this requirement for taxpayers with total assets in excess of $10 million.

In remarks to the New York State Bar Association Tax Section annual meeting, IRS Commissioner Doug Shulman said that requiring corporate taxpayers to disclose their uncertain tax positions would make corporate audits more efficient. “Today, we spend up to 25 percent of our time in a large corporate audit searching for issues rather than having a straightforward discussion with the taxpayer about the issues,” he said in prepared remarks.

Shulman characterized the plan as a reasonable approach to the problem. “We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions,” he said.

According to the announcement, the schedule will require:

(i) a concise description of each uncertain tax position for which the taxpayer or a related entity has recorded a reserve in its financial statements and

(ii) the maximum amount of potential federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer’s risk analysis regarding its likelihood of prevailing on the merits).

The concise description of each uncertain tax position will have to contain sufficient detail that the IRS can determine the nature of the issue, including the rationale for the position and the taxpayer’s reasons for determining that it is an uncertain position. According to the announcement, the description would have to contain:

1. The Code sections potentially implicated by the position;
2. A description of the taxable year or years to which the position relates;
3. A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
4. A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
5. A statement whether the position involves a determination of the value of any property or right; and
6. A statement whether the position involves a computation of basis.

Uncertain tax positions include positions for which the taxpayer must establish a tax reserve under FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, as well as positions for which the taxpayer has not established a reserve because the taxpayer expects to litigate the position or has determined the IRS has a general practice not to examine the position.

The announcement says that the schedule would not require the disclosure of the taxpayer’s risk assessment or tax reserve amounts (although the IRS reminds taxpayers that it “can compel the production of this information through a summons”).

The IRS anticipates issuing proposed regulations on this topic and says it is evaluating what penalties or sanctions should be imposed for failure to disclose.

The announcement also says that the IRS will continue its policy of restraint regarding requests for tax accrual workpapers during examinations.

The IRS has invited public comments on the plan; comments should be made before March 29, 2010. They can be mailed to Internal Revenue Service, CC:PA:LPD:PR (Announcement 2010-9), Room 5203, P.O. Box 7604, Ben Franklin Station, N.W., Washington, DC 20044, or e-mailed to Announcement.Comments@irscounsel.treas.gov, with a subject line that reads “Announcement 2010-9.”