The IRS posted a series of questions and answers about the new requirement for large corporations to report their uncertain tax positions. The seven FAQs address both reporting requirements for Schedule UTP, Uncertain Tax Position Statement, and the IRS’ policy of restraint.
For the 2010 tax year, corporations filing Form 1120, U.S. Corporation Income Tax Return; insurance companies filing Form 1120-L, U.S. Life Insurance Company Income Tax Return, or 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; and foreign corporations filing Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, must disclose their uncertain tax positions on Schedule UTP when the company or a related party issues audited financial statements and the company has (1) one or more uncertain tax positions that must be reported on Schedule UTP (as defined by the IRS in the schedule’s instructions) and (2) total assets of at least $100 million. The total asset threshold will be reduced to $50 million in 2012 tax years and to $10 million starting with 2014 tax years. The IRS is considering whether to extend UTP reporting to other taxpayers beyond those noted above for 2011 or later years.
On Sept. 24, 2010, the IRS announced that it was expanding its policy of restraint in connection with its decision to require certain corporations to file Schedule UTP and that it will forgo seeking particular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP (Announcement 2010-76).
Schedule UTP requirements. The FAQs clarify that a corporation subject to FASB Accounting Standards Codification 740-10 (FIN 48) does not need to report a tax position on Schedule UTP if the position is “highly certain” within the meaning of FIN 48.
According to the FAQs, if a corporation recorded a reserve in an audited financial statement for a tax position it expected to take in its 2010 tax return but later eliminated the reserve in an interim financial statement issued before filing the 2010 return, it must report the tax position on Schedule UTP if the interim financial statement is unaudited. The FAQs go on to say, however, that if a corporation reconsiders whether a reserve is required for a tax position and eliminates the reserve in an interim audited financial statement issued before the tax position is taken in a return, the corporation does not have to report the tax position to which the reserve relates on the Schedule UTP.
The FAQs clarify that corporations do not have to report the use of a net operating loss (NOL) or credit carryover in a post-2009 return if the portion of the NOL or the credit carryforward that is used includes a tax position taken in a pre-2010 return for which the corporation has recorded a reserve. However, the IRS warns that this FAQ does not otherwise affect the requirement that a corporation report a tax position claimed on a post-2009 return for which the corporation has recorded a reserve that is included in an NOL or credit carryover for potential use in a later year. The IRS promised additional guidance regarding reporting requirements for the use of NOLs and credit carryovers.
The FAQs also state that, in determining the size and ranking of a tax position on Schedule UTP, if an amount of interest or penalties relating to a tax position is not separately identified in the books and records as associated with that position, then that amount of interest and penalties is not included in the size of a tax position used to rank that position.
Policy of restraint. Two questions address whether the changes to the policy of restraint announced in Announcement 2010-76 apply to documents requested by IRS Appeals and to documents requested by IRS counsel after the filing of a Tax Court petition.
The FAQs affirm that the changes to the IRS policy of restraint apply to any request for documents during the IRS’ administrative process of determining the correct tax liability, including Appeals’ consideration of proposed audit adjustments.
AICPA concerns. Throughout the unveiling of the IRS’ uncertain tax position reporting plan, the AICPA has raised numerous concerns and made many specific recommendations regarding the IRS’ proposals. These concerns include:
- The burden that will be placed on smaller taxpayers when the plan is fully implemented in 2014 (the AICPA believes the asset threshold should be significantly increased);
- The potential burden the plan may place in future years on pass-through entities and tax-exempt organizations; and
- Duplicative reporting and the ultimate benefit to the government of the information received.
The AICPA has submitted comment letters and raised issues with the Service regarding the initiative (see JofA, “Tax Matters: AICPA, Others Ask IRS to Withdraw UTP Reporting Plan,” Aug. 2010, page 66, and “AICPA Positions on Recent IRS Proposals,” May 2010, page 30). Edward Karl, AICPA vice president–Taxation, said the Institute will continue to do so and push for a study period.
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