Procedure & Administration
Schedule UTP, Uncertain Tax Position Statement, was first required to be filed with tax year 2010 income tax returns by corporations that reported assets of $100 million or more on their tax return balance sheets and that met other filing criteria. Under transition rules for TY 2012 and TY 2013, the asset threshold dropped to $50 million, and it drops to $10 million for TY 2014 and later returns.
This item provides an overview of the IRS's statistics on Schedule UTP through the first three tax years of filings (TY 2010–2012). Since 2012 is the first year of required reporting for firms with lower asset levels, this item compares filing data for Schedule UTP filers that have assets in amounts above and below the first transitional threshold of $100 million. This item is an update to the Schedule UTP statistics discussed by Robert Adams in the Tax Practice & Procedures column of the October 2012 (p. 700) and July 2013 (p. 482) issues of The Tax Adviser. Those articles also outlined the basic Schedule UTP filing requirements, statistics for filers in the Compliance Assurance Program, and IRS treatment of Schedule UTP filers.
Additional information is available on the AICPA "Disclosure of Uncertain Tax Positions" webpage.
The IRS Large Business & International (LB&I) Division created Schedule UTP and 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.
How Schedule UTP Statistics Relate to Overall LB&I Corporate Income Tax Return Statistics
It is valuable to understand the size of the population of actual Schedule UTP filers relative to the overall population of corporate income tax return filers that potentially could be required to file the schedule. The best way to make that comparison is to analyze the characteristics of the corporations filing Schedule M-3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More.
Charles E. Boynton, Ph.D., CPA, the program manager and senior program analyst, Planning, Analysis, Inventory, and Research (PAIR) at LB&I, and his co-authors have written a series of articles analyzing LB&I's Schedule M-3 filing population (the M-3 studies). The corporate population in the M-3 studies only includes actual Form 1120 returns. The M-3 studies present the number of included companies that issue audited financial statements, by size of reported total assets. However, there are two areas of incongruence in relating the Schedule UTP filers to the M-3 studies population. Both the M-3 studies population and the Schedule UTP population include Form 1120 filers, but the M-3 studies exclude filers of Forms 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, 1120-L, U.S. Life Insurance Company Income Tax Return, and 1120-F, U.S. Income Tax Return of a Foreign Corporation. There are also timing differences. Schedule UTP statistics are grouped by the return form year printed on the face of the form filed. (For example, all relevant returns filed on 2011 forms will be counted in the 2011 statistics.) However, the M-3 studies use compilations made by the IRS's Statistics of Income (SOI) Division, which compiles its statistics on a fiscal year, looking at returns with year ends from July 31 of a given year through June 30 of the following year.
According to the M-3 studies for the SOI 2010 and 2011 years, the Schedule M-3 filing populations (and estimate of potential Schedule UTP populations) summarized by financial statement type and asset size were as shown in this exhibit.
Using this table, one can approximate the proportion of potential filers of Schedule UTP, those corporations with $10 million or more of assets that also issue audited financial statements that file Schedule UTP. Note that the M-3 study for 2012 has not been conducted as of this writing, so its analysis is excluded.
Schedule UTP Filing Statistics: TY 2010 and TY 2011 Return Averages Compared to TY 2012 Returns
- Based on the data published as of this writing at www.irs.gov, and other information PAIR shared for this article, here is how Schedule UTP statistics are trending. (Note that the IRS regularly updates these statistics.) Although for TY 2012, only companies with assets above $50 million were required to file Schedule UTP, some companies with fewer assets filed Schedules UTP in each of the three years. Therefore, in this analysis, one category includes filers with assets of "less than $100 million" rather than filers with asset amounts "between $50 million and $100 million." An average of 2,167 taxpayers filed Schedule UTP for each of TY 2010 and TY 2011; so far, for TY 2012, the IRS has processed 1,940 taxpayer filings of Schedule UTP, of which 1,742 taxpayers had assets of more than $100 million and 198 had assets of less than $100 million, which is roughly the same rate for TY 2012 as for TY 2010 and TY 2011. The 2,167 filers represent about 10% of the potential Schedule UTP filers (21,736 throughout this analysis) and only about 5.3% of the 41,188 filers in the total LB&I corporate population. The 198 filers with assets of less than $100 million represent about 1% of the potential Schedule UTP filers and only about 0.5% of all the filers in the total LB&I corporate population.
- Generally, the 388 taxpayers that filed Schedules UTP that included concise descriptions of uncertain tax positions (UTPs) for TY 2010 and TY 2011 were Coordinated Industry Case (CIC) taxpayers (that are constantly audited), and they reported an average of 3.97 UTPs per Schedule UTP. For TY 2012, 294 CIC taxpayers with assets of $100 million or more reported an average of 4.24 UTPs each, which appears to be increasing over the years at 3.79, 4.16, and 4.24 for TY 2010, TY 2011, and TY 2012, respectively.
- Generally, the 1,744 taxpayers that filed Schedules UTP that included UTPs for TY 2010 and TY 2011 were Industry Case (IC) taxpayers (that are not constantly audited), and they reported an average of 2.23 UTPs per Schedule UTP. For TY 2012, 1,431 IC taxpayers with assets of $100 million or more reported an average of 2.25 UTPs, and 194 IC taxpayers with assets of less than $100 million reported an average of 1.59 UTPs each. Though processing of the TY 2012 Schedule UTP filings is not complete, the trend in the IC average number of UTPs appears to be fairly flat: 2.11, 2.35, and 2.17, respectively for TY 2010 through TY 2012.
- In TY 2010 and TY 2011, an average of 35 filers filed Schedules UTP with no UTP descriptions. These were apparently filed by taxpayers to make a positive statement to the IRS that they had no UTPs required to be reported, which is contrary to the instructions for Schedule UTP as well as FAQ 5 (see www.irs.gov ). For TY 2012 schedules processed so far, that number is 21.
- Companies that file Schedule 10-K that also filed Schedules UTP numbered 1,234 in TY 2010, 1,232 in TY 2011, and 1,095 for returns processed and counted in the statistics so far in TY 2012. Of the 1,095 schedules, 1,043, or 60% of the total filings, were for filers with assets greater than $100 million, and 52, or 26%, were for filers with less than $100 million of assets. It appears that the trend may be about flat for the larger filers. As expected, fewer smaller filers are publicly traded companies.
- In TY 2010 and TY 2011, 47% and 41%, respectively, of the Schedules UTP filed reported only one UTP. This percentage has stayed flat for 2012 so far, with 943 schedules included. Of these 943 schedules, 804 were for filers with assets greater than $100 million representing 46% of that population's filings, and 139 were for filers with less than $100 million of assets representing 70% of that population's filings. Smaller filers seem to have fewer uncertain positions.
- The total number of UTPs disclosed on Schedules UTP, respectively, for TY 2010, TY 2011, and TY 2012 returns so far are 5,101, 5,784, and 4,744. Of the 4,774 UTPs for TY 2012, 4,465, or 94% of the total UTPs reported, were for filers with assets greater than $100 million, and 309 or 6% were for filers with less than $100 million of assets, reinforcing that smaller filers have fewer UTPs on average. The average number of UTPs disclosed on Schedules UTP for TY 2010, TY 2011, and TY 2012 by companies with $100 million or more of assets were about flat at 2.43, 2.68, and 2.49, respectively. The average number of UTPs disclosed on Schedules UTP for TY 2012 by companies with less than $100 million of assets was 1.59.
- The percentages (rounded) of international issues disclosed on Schedules UTP, respectively, for TY 2010, TY 2011, and in TY 2012 returns so far are flat at about 29%, 29%, and 28%. For TY 2012, 1,358 of the 4,774 UTPs or 28.45% were classified as international issues. Of the total 4,465 TY 2012 UTPs reported by filers with assets greater than $100 million, 1,304, or 29.2%, were international issues, and of the 309 UTPs reported by filers with less than $100 million of assets, 54, or 17.5%, were international issues, reflecting that fewer smaller companies engage in international operations than do larger companies.
- The three Code sections most often identified by Schedule UTP filers as underlying UTPs in each of the years TY 2010, TY 2011, and TY 2012, and their percentages of the total number of UTPs for each year, are: Sec. 41 (credit for increasing research activities), 22%, 24%, and 23%; Sec. 482 (transfer pricing), 22%, 23%, and 21%; and Sec. 263 (capitalization or deduction), 7%, 6%, and 6%. TY 2012 filers of Schedule UTP with assets greater than $100 million and filers with assets less than $100 million reported the following, respectively: Sec. 41, 20% and 4%; Sec. 482, 20% and 1%; and Sec. 263, 0% and 6%, indicating that many fewer smaller companies than larger companies engage in activities that would generate those issues.
- PAIR has sent
education and outreach letters ("soft
letters") to some Schedule UTP filers
expressing concern that the concise
descriptions in the taxpayers' schedules are
not consistent with the instructions for the
schedule. In the first letter that a filer
receives, the following language appears:
A compliant Schedule UTP must include a concise description for each reportable uncertain tax position. The Schedule UTP instructions require that a taxpayer "provide a concise description of the tax position, including a description of 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 nature of the issue."
The following description(s) included on the Schedule UTP filed with your [year for which first letter is received] corporate income tax return do not meet the requirements for a concise description:
[Here the description(s) deemed inadequate are quoted verbatim from the schedule filed.]
This letter advises you that any future filings of Schedule UTP must follow the directions set forth in the Schedule UTP instructions for completing concise descriptions. It also serves as notice that future returns will be reviewed.
In the second letter that a filer receives, the relevant language, which PAIR says is intended to be more forceful, is as follows:
Following our review of the Schedule UTP filed with your [year for which second letter is received] corporate income tax return, we advised you that one or more of the concise descriptions on the Schedule UTP didn't meet these requirements.
The following descriptions included on the Schedule UTP filed with your corporate income tax return also did not meet the requirements for a concise description:
[Here the description(s) deemed inadequate are quoted verbatim from the schedule filed.]This letter advises you that any future filings of Schedule UTP must follow the directions set forth in the Schedule UTP instructions for completing concise descriptions. Failure to follow UTP concise description guidelines will result in additional review of your tax returns and other available information to determine if an examination is needed.
According to PAIR, 105 letters covering 170 positions were sent to taxpayers in connection with TY 2010 returns; 760 letters covering 1,213 positions were sent for TY 2011 returns; and as of this writing, PAIR has or will send out 462 letters covering 816 issues in connection with TY 2012 returns, indicating an improvement in compliance. Nonetheless, 42 second letters were sent out for TY 2011 returns, and so far 294 second letters have been sent out for TY 2012 returns. That is not a good trend since it seems quite apparent that reporting inadequate concise descriptions, especially for more than one year, raises the risk of an IRS examination.
Other Comments and Observations
PAIR is actively cataloging UTPs by company type and size, industry, how many issues a company has, whether issues are major (each issue accounts for at least 10% of a filer's total U.S. income tax reserve), whether companies are filing in more than one year, whether a company is being chastised for inadequate disclosures, whether international issues are involved, what issues are being reported by which taxpayers in years later than the years in which the positions disclosed were originally taken, etc. Soft letters quoting each inadequate description are being sent to taxpayers that are deemed not to have met the requirements to concisely describe UTPs.
Since this is being done on a taxpayer-by-taxpayer, issue-by-issue basis, it is clear that PAIR is looking at, analyzing, and judging every issue description being reported. It also seems clear that LB&I intends to use Schedule UTP information as part of its decision-making process in determining which taxpayers to examine, especially if a taxpayer receives a second soft letter. Hopefully, the carefully maintained statistics will lead to formal guidance or LB&I directives that would make treatment of confusing issues clearer. After all, that was one promise made when Schedule UTP was first released.
One would wonder if taxpayers filing Schedule UTP without any issue descriptions will quit filing them, although the numbers are dwindling each year—41, 28, and 21 taxpayers filed Schedules UTP without describing a single issue in TY 2010, TY 2011, and TY 2012, respectively.
It is curious that taxpayers with asset levels less than the threshold filing criteria filed Schedules UTP: 61 for TY 2010, 85 for TY 2011, and 34 for TY 2012. While there may be reasons those taxpayers filed without being required to, PAIR has not investigated those reasons. It is possible that some of those filers filed Form 1120-F, for which the asset threshold is measured on a worldwide basis rather than being measured by the amount of assets located in the United States. It could also be that some filers based their requirement to file the schedule on the beginning-of-the-year assets rather than year-end assets as the instructions require.
It also seems apparent that smaller companies bear a greater relative compliance burden, given their small share of the overall LB&I population of taxpayers issuing audited financial statements and the large number of them that file Schedule UTP with only one issue. If the same pattern holds after the transition period, will LB&I eliminate Schedule UTP filing requirements for smaller companies, as the AICPA previously requested? It will be interesting to see what percentage of taxpayers with audited financial statements and with assets as little as $10 million are required to file Schedule UTP, given that that population is much larger, using the M-3 studies as a proxy to determine the number of corporations in that group, than the number of taxpayers otherwise meeting the criteria and having assets greater than $100 million.
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.
|Valrie Chambers is an associate professor of accounting at Stetson University in Celebration, Fla. Robert Adams is a partner with McGladrey LLP and leads the firm’s Washington National IRS Practice and Procedure team. Adams is a member of the AICPA IRS Advocacy & Relations Committee. For more information about this column, contact Prof. Chambers at firstname.lastname@example.org.|