Schedule UTP: Update on IRS Findings

Editor: Valrie Chambers, Ph.D., CPA

Procedure & Administration

The IRS has now received virtually all Schedules UTP, Uncertain Tax Position Statement, that relate to tax years beginning in 2010 (TY 2010) and, as of March 2013, probably about two-thirds of Schedules UTP for tax years beginning in 2011 (TY 2011). This item provides an overview of the IRS’s statistics on those filings and is an update to the Schedule UTP statistics discussed in the October 2012 issue of The Tax Adviser (see Adams, “Schedule UTP: IRS Findings,” 43 The Tax Adviser 700 (Oct. 2012)).

The previous item also gave statistics about Schedule UTP filers in the Compliance Assurance Program (CAP) and informed readers about IRS training and audit activity relating to Schedule UTP, including what the IRS is doing with taxpayers that do not fully comply with Schedule UTP instructions. That information has not basically changed and is not repeated here. Additional information is available on the AICPA IRS Practice and Procedure “Disclosure of Uncertain Tax Positions” webpage.

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

The IRS Large Business & International (LB&I) Division created Schedule UTP. LB&I maintains a centralized review process that enables it to (1) review all Schedules UTP filed and analyze them 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 them; and (4) determine the proper use and treatment of Schedules UTP.

Schedule UTP Filing Statistics: TY 2011 and TY 2010 Returns

Following are the statistics for TY 2011 returns processed as of March 2013 (again, roughly two-thirds of those expected) and for all TY 2010 returns. The statistics for TY 2010 returns should be final, but they could change slightly if amended 2010 returns containing Schedule UTP are filed and original returns did not include the schedule. The TY 2011 return statistics consist primarily of calendar-year filers, so they will increase as returns of fiscal-year filers continue to be received.

• 2,356 taxpayers filed Schedule UTP for TY 2010; so far, the IRS has processed returns of 1,677 taxpayers filing Schedule UTP in their TY 2011 returns. It appears that the run rate is roughly the same for TY 2011 as for TY 2010.
• 21% of all returns including Schedule UTP for TY 2010 were filed by Coordinated Industry Case (CIC) taxpayers (that are constantly audited), who had an average of 3.1 UTPs per Schedule UTP; 18% of all TY 2011 returns including Schedule UTP were filed by CIC taxpayers, who had an average of 3.8 UTPs per Schedule UTP. While the average number of UTPs reported by CIC taxpayers appears to have increased by more than 20% between TY 2010 and TY 2011, it is too early to form that conclusion since the average could change substantially when the remaining TY 2011 CIC returns are processed.
• 79% of all returns including Schedule UTP for TY 2010 were filed by Industry Case (IC) taxpayers (that are not constantly audited), who had an average of 1.9 UTPs per Schedule UTP; 82% of all TY 2011 returns including Schedule UTP were filed by IC taxpayers, who had an average of 2.0 UTPs per Schedule UTP.
• 4,712 UTPs in total were disclosed on TY 2010 Schedules UTP; 4,211 UTPs in total have been disclosed so far on TY 2011 Schedules UTP. Of the TY 2011 UTPs, 936 were prior-year positions reported as required on Part II of Schedule UTP that first became relevant for TY 2011 returns (see “Expectations for Future Schedule UTP Filings” below).
• 49% of all Schedule UTP returns filed for TY 2010 included only one UTP; 44% of all Schedule UTP returns filed for TY 2011 included only one UTP.
• The top three Code sections listed as underlying all disclosed UTPs in both TY 2010 and TY 2011 returns were Sec. 41 (credit for increasing research activities), Sec. 482 (transfer pricing), and Sec. 162 (trade or business expenses). Analysis of UTP filers’ concise descriptions, however, revealed that the third-highest primary Code section underlying UTPs is actually Sec. 263, capitalization. The percentages in each year are shown in the exhibit.

Additional statistics for TY 2010 returns with Schedules UTP (as of April 2012) are listed below. While comparable statistics are not yet available for TY 2011 returns, they are anticipated to be roughly the same.

• 3% of all returns filed with Schedule UTP were filed by CAP taxpayers. (Most CAP taxpayers would also be CIC taxpayers.)
• 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).
• 41% of returns with Schedule UTP attached were prepared by the Big Four accounting firms.

Expectations for Future Schedule UTP Filings

Beginning with TY 2011, corporations are required to report on Part II of Schedule UTP tax positions taken in prior-year returns (except in years prior to 2010) if that position was not reported on the prior-year Schedule UTP and the financial statement tax reserve was established in the current year. Due to that requirement, the IRS expects a slight increase in the average number of total positions reported per taxpayer between TY 2010 and TY 2011 returns. The IRS states that it will later break out the total number of positions reported between current-year and prior-year positions.

LB&I has not yet published an estimate of additional Schedule UTP filings for TY 2012, when the filing requirement threshold drops to $50 million of total assets on the tax return balance sheet. However, LB&I is reviewing SEC data to determine the number of companies reporting total assets between $50 million and $100 million that have had current-year additions to uncertain tax benefits, to estimate the number of filings that companies in this size range might make. Further, LB&I has no published estimate of potential additional filings for TY 2014, when the asset threshold amount is scheduled to drop to $10 million or more.

Changes to Filing Requirements for Schedule M-3

When Schedule UTP was introduced, an LB&I task force was established to make recommendations for modifications to the filing requirements for Schedule M-3, Net Income (Loss) Reconciliation, and on May 10, 2013, the IRS announced changes to those filing requirements. (A summary of the IRS changes is available here.) The changes apply only to filers of Forms 1120; 1120-C, U.S. Income Tax Return for Cooperative Associations; 1120-F; 1120S, U.S. Income Tax Return for an S Corporation; 1065, U.S. Return of Partnership Income; or 1065-B, U.S. Return of Income for Electing Large Partnerships, that report total assets between $10 million and $50 million on the return balance sheet. Taxpayers meeting those criteria:

• May file Schedule M-1, Reconciliation of Income (Loss) and Analysis of Unappropriated Retained Earnings per Books, in place of Parts II and III of Schedule M-3;
• Will be required to file Schedule M-3, Part I, lines 1–12; and
• Will not be required to file Form 1120, Schedule B, Additional Information for Schedule M-3 Filers; Form 1065, Schedule C, Additional Information for Schedule M-3 Filers; or Form 8916-A, Supplemental Attachment to Schedule M-3.

These changes are effective for tax years ending on or after Dec. 31, 2014. No changes are currently planned in the Schedule M-3 filing requirements for filers of Forms 1120-L or 1120-PC, or for Form 1120 mixed-group taxpayers. The IRS stated that the reason for these changes is to reduce the filing burden and simplify reporting.

The IRS continues to consider changes to Schedule M-3 requirements for other taxpayers. For more information on these prospective changes to filing requirements for Schedule M-3, see “Schedule M-3 Filing Requirement Reduced for Entities Below $50 Million in Assets.”

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

This item represents the views of the author and does not necessarily represent the views of McGladrey LLP. This item does not constitute professional advice.

EditorNotes

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