The Intersection of FIN 48 and Tax Opinions




FASB’s Interpretation no. 48, Accounting for Uncertainty in Income Taxes, has changed how enterprises recognize and measure tax benefits associated with tax positions and disclose in their financial statements uncertainties related to income tax positions.

Most enterprises have found they must take a variety of steps to comply, including determining what evidence is needed to support their tax positions. With the implementation deadline for nonpublic companies now extended to periods beginning after Dec. 15, 2007, companies implementing FIN 48 may join those that implemented it last year in deciding they need a third-party tax opinion to help demonstrate that FIN 48’s more-likely-than-not (MLTN) recognition threshold is met.

Under the Interpretation, absent the existence of a widely understood administrative practice and precedent of the taxing authority, an enterprise cannot recognize a tax benefit in its financial statements unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority, based solely on the technical merits of the associated tax position. In this evaluation, an enterprise must assume that the position (1) will be examined by a taxing authority that has full knowledge of all relevant information and (2) will be resolved in the court of last resort.

FIN 48 indicates that an enterprise is not required to obtain a third-party tax opinion to demonstrate that it meets the MLTN threshold. An enterprise, however, should consider all relevant information in determining whether a tax opinion is warranted, including the nature and complexity of the issue, the magnitude of potential exposures, the state of applicable law (well-developed or evolving), and whether the enterprise has the required expertise to evaluate all available evidence and the uncertainties surrounding the relevant statutes or case law. In all cases, an enterprise must have sufficient evidence to support its assertion based on the technical merits under the relevant law.

Which opinion matters more—a third-party external adviser’s or the external auditor’s? Even if the enterprise receives a tax opinion that the MLTN threshold is met for a specific tax position, the external auditor has a professional responsibility to develop an independent conclusion, since the external auditor’s education, training and experience make him or her knowledgeable about income tax matters.

If the external auditor’s conclusion differs from the tax opinion, the auditor will need to analyze the potential misstatement and communicate it to management and the audit committee. Consequently, enterprises should involve the external auditor early in the process to avoid surprises.

If the tax opinion relates to the constitutionality of an income tax, the external auditor is not professionally responsible for an independent conclusion on its constitutionality. But the auditor must still assess whether the opinion provides sufficient competent evidential matter to support the auditor’s opinion on the financial statements.

Can an external auditor provide a tax opinion without compromising independence? Yes. According to the AICPA’s Professional Ethics Committee, such services do not impair auditor independence, provided the enterprise can make an informed judgment on the results of the services provided and the auditor meets the other requirements of Interpretation 101-3, Performance of Nonattest Services , of Rule 101, Independence , of the Code of Professional Conduct (see frequently asked question No. 23, In meeting those requirements, an auditor may assist a client in understanding why the tax positions do or do not meet the MLTN threshold and the basis for any unrecognized tax benefit, so that the client can accept responsibility for the amounts reported and disclosed in the financial statements.

Enterprises should decide whether to obtain a tax opinion after evaluating all available evidence and the uncertainties surrounding the relevant statutes or case law. Although a tax opinion can provide support for an enterprise’s tax position, it does not replace solid tax planning, nor does it guarantee a successful defense.

By Rita Benassi, CPA, New England tax managing partner and national leader, FAS 109 Competency Group, Deloitte Tax LLP, and Randall Sogoloff, CPA, partner, Accounting Standards and Communications, Deloitte & Touche LLP.

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