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Thursday, July 29, 2010

IRS Announces Instructions for Reporting Uncertain Tax Positions for 2010


The IRS recently released the draft schedule and instructions for reporting uncertain tax positions. The new Uncertain Tax Position Statement (“Schedule UTP”) generally would require a corporation with assets of at least $10 million to disclose to the IRS the company’s FIN 48 and other tax reserves. Below is an overview of the draft instructions to assist you in determining the potential impact of reporting for your company.

Summary of IRS Announcement 2010-9

On January 26, 2010, IRS Announcement 2010-9 (“2010-9”) outlined newly required tax return disclosures for uncertain tax positions for which:

1. a reserve has been established under Financial Interpretation 48 (“FIN 48”) or other accounting standards,

2. no reserve is established because the taxpayer expects to litigate the issue and ultimately prevail, and

3. no reserve is required because the taxpayer has determined that the IRS has a general administrative practice not to examine the item or issue.

On April 19, 2010, the IRS issued a draft schedule and instructions for reporting uncertain tax positions, the Schedule UTP, generally effective for tax years beginning on or after December 15, 2009. The schedule and instructions were issued for a comment period after which the final forms will be issued. A company must file Schedule UTP for the 2010 tax year if:

1. its assets equal or exceed $10 million,

2. the company or a related party issued an audited financial statement and that statement covers all or a portion of the company’s operations for the corporation’s tax year, and

3. the company has one or more tax positions reportable on Schedule UTP.

Other key items disclosed in the instructions:

  • A corporation will not be required to report a position taken in a tax year beginning before December 15, 2009, or a tax year beginning on or after December 15, 2009 and ending on January 1, 2010.
  • A position must be reported if a decision was made to record a reserve 60 days before filing the tax return. Also, a position must be reported if a decision was made not to record a reserve within 60 days of filing the return, based upon an expectation to litigate or an IRS administrative practice.
  • A concise description of the uncertain tax position must be provided (2010-9 actually required a rationale why the position was uncertain; the instructions do not).
  • A determination of the maximum tax adjustment (MTA) will not be required for transfer pricing or valuation provisions.

Practical Tax Department Implications

Notwithstanding the stated intent of 2010-9 is reporting transparency, not to obtain access to the taxpayer tax accrual work papers, the disclosure of these positions effectively provides that access. 2010-9 and the draft instructions for Form UTP will intensify scrutiny on FIN 48 (Accounting for Uncertainty in Income Taxes) because the recording of a reserve position will now require disclosure. Many tax professionals fear that this required disclosure is the IRS’ “road map for audit.”

Taxpayers should evaluate historically reported FIN 48 reserves (particularly if it is a continuing reserve, as it appears that these must be reported), especially from the perspective of what they contemplate reporting in the current year. Many tax professionals focused intensely on the “more-likely-than-not” sufficiency of a FIN 48 reserve during the initial FIN 48 implementation. In subsequent years, it appears that many Tax Departments have rolled forward reserves from prior years, satisfied with adjusting interest and penalty computations and anticipating the tolling of statutes of limitations. Other Tax Departments have chosen a more proactive approach by revisiting their initial FIN 48 analyses, focusing on the standards for subsequent recognition, derecognition and measurement, considering potential new or additional facts and recent law changes or interpretations.

Based upon Armanino’s experience with the intricacies of implementing FIN 48 for over 50 public companies, we support proactively revisiting the analysis and support for prior years’ FIN 48 reporting. We are assisting our clients in analyzing their FIN 48 positions to determine the sufficiency of support for the reserves. This review coincides with developing support for the potential tax return disclosures required by 2010-9, both those for which a FIN 48 reserve has been recorded and those for which a reserve has not been recorded. We would appreciate the opportunity to share with you what we are observing and hearing your point of view.

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