Schedule UTP: IRS Findings

Editor: Valrie Chambers, Ph.D., CPA

Procedure & Administration

Since the inception of Schedule UTP, Uncertain Tax Position Statement, much has been spoken and written about it. Now, there is enough data to report what the IRS has found regarding Schedule UTP filings by corporations with $100 million or more of total assets on their tax return balance sheets, and what the IRS is doing with that information. This column provides an overview of those findings. Additional information is available on the AICPA IRS Practice and Procedure group’s “Disclosure of Uncertain Tax Positions” webpage.

Schedule UTP was first required to be filed for tax year (TY) 2010 returns by corporations that:

• Issue or are included in audited financial statements that report reserves for contingent U.S. income tax liabilities in accordance with FASB Accounting Standards Codification Subtopic 740-10 (formerly FIN 48, Accounting for Uncertainty in Income Taxes) or any other accounting standard for positions in the corporations’ U.S. income tax returns;
• File Forms 1120, U.S. Corporation Income Tax Return; 1120-F, U.S. Income Tax Return of a Foreign Corporation; 1120-L, U.S. Life Insurance Company Income Tax Return; or 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
• Report total assets of $100 million or more on their tax return balance sheets.

In accordance with transition rules for 2012, Schedule UTP is required for corporate tax returns that meet the first two criteria listed above and that report $50 million or more of total assets on their tax return balance sheets. That threshold drops to $10 million for 2014 tax returns.

Schedule UTP was created and is required as part of the IRS strategy to improve compliance through greater transparency. The IRS expects Schedule UTP to reduce the time it takes to find issues and give revenue agents and taxpayers more time during tax audits to discuss the law as it applies to the facts, rather than looking for information. In addition, it is expected to help identify areas of uncertainty that require guidance and to allow prioritization in the selection of issues and taxpayers for examination.

The IRS Large Business & International (LB&I) Division created Schedule UTP. LB&I maintains a centralized review process that enables it to (1) review every Schedule UTP that is filed and analyze the schedules to determine if the disclosures comply with the relevant instructions; (2) select issues for audit and identify trends; (3) identify gaps in guidance and move to fill those gaps; and (4) determine the proper use and treatment of Schedules UTP.

As of July 13, 2012, LB&I is reporting the following experiences with Schedule UTP filings for 2010 returns.

Current Audits and Training

Information on Schedules UTP is now being used in audits. Guidance and continuing professional education on requirements and procedures for uncertain tax position (UTP) audits were issued to Compliance Assurance Process (CAP) teams in the summer of 2011. A course for just-in-time training covering the revised policy of restraint and the use of Schedule UTP in the planning, execution, and resolution phases of the qualified examination process was finalized in December 2011. Examiners and specialists complete this training just prior to starting the audit of a return that includes a Schedule UTP. LB&I is not discussing or disclosing how Schedule UTP information is or will be used in conjunction with other information to select returns for audit.

Schedule UTP Filing Statistics, TY 2010 Returns

LB&I previously announced the following statistics, as of April 2012, for TY 2010 returns (see next paragraph for updates).

• 1,947 taxpayers filed Schedule UTP;
• 21% of all returns filed with Schedule UTP were filed by Coordinated Industry Case (CIC) taxpayers (those taxpayers that are constantly audited), who had an average of 3.1 UTPs per Schedule UTP;
• 79% of all returns filed with Schedule UTP were filed by Industry Case (IC) taxpayers (those taxpayers that are not constantly audited), who had an average of 1.9 UTPs per Schedule UTP;
• 3% of all returns filed with Schedule UTP were filed by CAP taxpayers (most CAP taxpayers would also be CIC-class taxpayers);
• 4,186 issues in total were disclosed;
• 49% of all Schedule UTP returns filed included only one UTP;
• The top three Code sections listed as underlying all disclosed UTPs were Secs. 41 (credit for increasing research activities), 482 (allocation of income and deductions among taxpayers), and 162 (trade or business expenses);
• 25% of all UTPs were international issues;
• 21% of all UTPs disclosed were transfer-pricing issues (Sec. 482);
• 97% of Schedules UTP were attached to Form 1120;
• 3% of Schedules UTP were attached to Forms 1120-F, 1120-L, and 1120-PC;
• 32% of all UTPs disclosed were from taxpayers in three states (California, New York, and Texas); and
• 41% of returns with Schedule UTP attached were prepared by the Big Four accounting firms.

Updated figures as of July 13, 2012, indicate that 2,144 taxpayers filed Schedule UTP for TY 2010, with 4,766 issues being disclosed in total. The top three Code sections involved in the disclosures did not change due to the increased number of filings, and the ratios described above remained roughly the same.

Schedule UTP Audit Activity

LB&I sent letters to certain taxpayers to inform them that their Schedule UTP had one or more “concise descriptions” that did not meet the requirements. (A concise description should describe “the relevant facts affecting 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” (Instructions for 2011 Schedule UTP (Form 1120).) In those cases, a copy of the letter was also sent to holders of a valid power of attorney. Those letters do not require any action by taxpayers regarding their 2010 Schedule UTP, but they do advise taxpayers to ensure that in future filings of Schedule UTP, the instructions regarding concise descriptions should be carefully followed. All Schedules UTP will continue to be subject to centralized review by LB&I.

CIC taxpayers are continually audited; therefore, all 2010 Schedules UTP filed by CIC taxpayers (21% of all Schedule UTP filers), are now or were under audit. More than half of IC taxpayers that filed a 2010 Schedule UTP (79% of all Schedule UTP filers) are now or were under audit. The rest of 2010 Schedules UTP were filed by other taxpayers that may still be chosen for audit, subject to the statute of limitation.

During audits, information about the content of Schedules UTP is reported to program directors to collect data and improve the program. When audit plans are completed, a report is made on whether and which UTPs will be examined. At the completion of audits, a report is made that includes (1) which UTPs were audited and the results on each; (2) for UTPs not pursued, why they were not; and (3) information on which UTPs have never been seen before, which need guidance, etc.

Schedule UTP Audit Activity: CAP Taxpayers

Taxpayers in the CAP program undergo real-time audits. The ultimate goal of these real-time audits is to ensure that CAP taxpayers comply with the tax law when they file their returns. If they do, only a short post-filing review is made of all positions taken in the return to see that UTPs that were resolved were properly filed—after which there is never another review of that return. The equation underlying CAP is: Full Transparency = Certainty When Return Filed. CAP taxpayers are expected to be completely forthcoming about their UTPs, but they must still include Schedule UTP in their returns in accordance with the rules applicable to non-CAP taxpayers.

It is interesting and informative to know how CAP taxpayers fared with Schedule UTP:

• 36 CAP taxpayers filed Schedule UTP;
• 136 issues were disclosed in total;
• All issues disclosed by CAP taxpayers were reviewed by their CAP audit teams;
• Only one issue was disclosed on a CAP taxpayer’s Schedule UTP that the audit team was unaware of and that required examination after the CAP return was filed; and
• Prominent issues (in addition to those mentioned in the list under “filing statistics,” above) were repairs, lease-in-lease-out transactions, and allocations of overhead.

LB&I interprets these results as demonstrating a very high level of transparency within the CAP taxpayer group. Where issues were not resolved prior to the filing of CAP taxpayers’ returns, thereby requiring reserves for U.S. income tax to remain on the taxpayers’ financial statements, it was because the issues depended on the issuance of guidance and/or directives.

Expectations for Future Schedule UTP Filings

Filings of TY 2011 returns with Schedule UTP attached are just starting to come in. LB&I estimates it will receive about 200 to 300 more Schedule UTP filings for TY 2011 than it received for 2010, primarily due to companies’ having established U.S. income tax reserves for the first time in 2011 financial statements where those reserves relate to positions reported in 2010 returns.

For TY 2012, when the filing requirement threshold drops to $50 million of total assets on the tax return balance sheet, LB&I does not yet have an estimate of additional Schedule UTP filings. However, LB&I is currently reviewing SEC data to determine the number of companies owning total assets in the $50 million to $100 million asset range that have had current-year additions to uncertain tax benefits, in order to estimate the potential number of filings that might be made by companies within this size range. At this point, LB&I has no estimate of potential additional filings that may be made for TY 2014, when the asset threshold amount is scheduled to drop to $10 million or more.

One threshold matter is certain, though. LB&I has repeatedly stated to the AICPA IRS Practice and Procedures Committee that there will be no pullback in the requirement for filing Schedule UTP at the second transition total asset threshold of $50 million. Schedule UTP filings will be required with TY 2012 returns for companies that meet that threshold, if they meet the other requirements.

Review of Schedule M-3

In 2010, when LB&I announced Schedule UTP reporting requirements, it also announced that it would create a working group to study Schedule M-3 to see where it, or its filing requirements, could be modified in light of Schedule UTP requirements. The working group has been operating and has obtained extensive input from both external and internal stakeholders. Those stakeholders have recommended various options for revising and/or streamlining Schedule M-3 and its filing requirements. The M-3 working group has completed a thorough review of the feedback and has recommended changes. At the time of this writing, those proposed changes are waiting for approval from LB&I and the IRS commissioner. It is planned that the recommendations will be published for public comment as soon as all approvals are received. LB&I anticipates that a revised final Schedule M-3 form and instructions, and/or new filing requirements, will be implemented for TY 2013. While this could be good news to taxpayers in many respects, it could mean that tax return preparation processes will need modification in time to deliver the correct information for any revisions made to the Schedule M-3 form itself.

The UTP area continues to evolve, so watch for additional changes and updates.

EditorNotes

Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, Texas. Bob Adams is a partner with McGladrey LLP and leads the firm’s Washington National Tax IRS Practice and Procedure team. Prof. Chambers and Mr. Adams are members of the AICPA Tax Division IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at valrie.chambers@tamucc.edu.