IRS Issues Proposed Regs Requiring Disclosure of Uncertain Tax Positions

The IRS issued proposed regulations (REG-119046-10) that would require certain business taxpayers to report uncertain tax positions on their tax returns. The regulations are the latest step in an initiative the IRS launched in January with the release of Announcement 2010-9.

In April, the IRS released a draft Schedule UTP, Uncertain Tax Position Statement, and draft instructions. The proposed regulations require taxpayers with uncertain tax positions and assets of $10 million or more to file Schedule UTP starting next year if they, or a related entity, issue audited financial statements. Affected taxpayers include corporations required to file Form 1120, insurance companies required to file Forms 1120-L or 1120-PC, and foreign corporations required to file Form 1120-F.

The preamble to the proposed regulations says this will allow the IRS to “quickly and efficiently identify those returns, and the issues underlying those returns, that present a significant risk of noncompliance with the Internal Revenue Code.”

When the proposed regulations are finalized, the Schedule UTP filing requirement will apply to returns filed for tax years beginning after December 15, 2009, and ending after the date the final regulations are published in the Federal Register.

AICPA Concerns

In June, the AICPA submitted comments to the IRS on its uncertain tax position proposal. The AICPA’s concerns about the proposal focus on six areas:

• The proposal potentially undercuts the integrity of the financial statement process;
• It will impose an increased burden and cost on taxpayers substantially disproportionate to any actual benefit to the IRS;
• It will create a new tension among and between taxpayers, tax advisers and the IRS, and alter the current self-assessment system;
• It will produce complexity and result in distortions that will impede the stated IRS goals;
• It will disproportionately impact small businesses; and
• It calls for taxpayer reporting at a higher level than mandated by Congress.

The AICPA recommends that the IRS focus on improving its use and management of the substantial amount of disclosed information that it already possesses, rather than requiring substantial amounts of new information.

The AICPA also recommends that the IRS conduct a pilot program and evaluate the results before deciding whether to expand the required reporting of uncertain tax positions.

For more on the AICPA’s concerns, see “AICPA Submits Comments on IRS Uncertain Tax Position Proposal” and the AICPA Tax Division’s Web page, “Disclosure of Uncertain Tax Positions.”

The AICPA is now putting together a working group to study the proposed regulations and make further recommendations to the IRS.

Comments and Hearing

The IRS has requested comments on the proposed regulations by October 12 and has scheduled a public hearing for October 15 at the IRS Building in Washington. Comments can be posted electronically at www.regulations.gov (with the subject IRS REG-119046-10).