The AICPA and other accounting, legal and business groups called upon the IRS to withdraw its proposed requirement that businesses above a $10 million asset threshold report their uncertain tax positions. The groups responded to the IRS’ request for comments on its three announcements earlier in the year (2010-9, 2010-17 and 2010-30), with the latest unveiling a draft Schedule UTP that would be attached to the returns of affected taxpayers. For previous JofA coverage of the initiative, see “Tax Matters,” July 2010, page 52; May 2010, page 73; and April 2010, page 51; also “AICPA Positions on Recent IRS Proposals,” May 2010, page 30.
All of the comments and the letter (tinyurl.com/292qk4p) signed by Alan Einhorn, chair of the AICPA’s Tax Executive Committee, said that barring withdrawal of the proposal, the IRS should substantially revise it. The letter outlined a half-dozen broad policy concerns and offered numerous specific criticisms and suggested changes.
Similar critiques were submitted by the Tax Executives Institute (TEI), the American Bar Association’s Section of Taxation and an ABA standing committee, as well as a number of accounting and legal firms and practitioners.
Under the proposal, business taxpayers with total assets of more than $10 million would be required to file new Schedule UTP, Uncertain Tax Position Statement, if they have one or more uncertain tax positions. Starting with 2010 tax years, the proposal would require affected taxpayers that file Forms 1120, 1120-F, 1120-L or 1120-PC to disclose details about each uncertain tax position. Uncertain tax positions include tax positions for which the taxpayer or a related entity has recorded a reserve in its audited financial statements under FASB Interpretation no. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, (now codified under ASC Topic 740) or other accounting standards, and tax positions taken by a corporation in a tax return for which a reserve has not been recorded by the corporation or a related party based on an expectation that the position will be litigated or that IRS administrative practice is not to examine the position.
Taxpayers will also be required to disclose the maximum amount of potential federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer’s risk analysis regarding its likelihood of prevailing on the merits).
Pass-through and tax-exempt entities are excused from the Schedule UTP filing requirement for 2010, but in announcements 2010-9 and 2010-17 the IRS raised the possibility of requiring such organizations to file Schedule UTP in the future.
In the comment letter, the AICPA said the proposal is counterproductive to its stated purpose of enabling the Service to more efficiently and profitably target its examinations. It oversteps statutory standards for taxpayer reporting and increases complexity and costs and other burdens for taxpayers—disproportionately so for small businesses, the AICPA said. It introduces “new tension” between and among taxpayers, tax advisers and the IRS and would unduly influence the process of preparing financial statements.
If the IRS nonetheless goes ahead with the proposal, the AICPA recommends that it should raise the reporting threshold to include only taxpayers with both assets exceeding $50 million and annual gross receipts above $100 million. The IRS should also impose a sunset date, such as after three years, and then rescind the program unless, weighing the program’s costs and benefits at the end of that period, it can publicly demonstrate “clear and verifiable improvements in compliance or efficiency,” the AICPA said. Other suggested changes or alternatives included:
- Tax-exempt and pass-through entities should be permanently excluded from the requirement, although the latter could still report information to shareholders or partners that need to report their uncertain tax positions.
- The IRS should make better use of information it already requires taxpayers to disclose before implementing the UTP proposal. For example, IRC § 6662 requires taxpayers to report tax positions that lack substantial authority—disclosures the Service apparently has done little to monitor, the AICPA said. Moreover, the UTP regime, by adopting FIN 48’s more-likely-than-not reporting threshold, would impose a more stringent standard than Congress mandated in section 6662.
- Preparing Schedule UTP will be more complicated and burdensome than merely transferring data to it from financial statements, as the IRS has suggested. Disclosing the maximum amount of potential federal tax liability attributable to each uncertain tax position may require additional calculations. The AICPA requests that taxpayers at least be allowed to report the results of these calculations as ranges rather than a specific amount for each item, and that they be allowed to use reasonable estimates of the tax benefits in determining the range.
- The scope of the required disclosures should be narrowed to exclude positions the taxpayer has no intention of litigating and positions that the IRS has a general administrative practice of not examining. It should also exclude items that have no material effect on federal tax liability or are related to timing differences.
The ABA warned the proposal could undermine protections afforded by the attorney-client privilege, attorney work product doctrine and the tax practitioner privilege of IRC § 7525. And although IRS officials have offered assurances otherwise, the ABA said the proposal could effectively dismantle the Service’s historic policy of restraint with regard to examining tax accrual workpapers, a point also emphasized by the TEI.
IRS Announcements 2010-9, 2010-17 and 2010-30
By Tax Matters Editor Paul Bonner.
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