On June 1, the AICPA submitted comments to the IRS on the Service’s proposal to require certain business taxpayers to disclose their uncertain tax positions on their tax returns. The comments raise concerns the AICPA has with the proposal and make several recommendations to the IRS. In its comments, the AICPA urges the IRS to withdraw the proposal and focus on existing disclosure mechanisms that already supply information to the Service. However, if it does move forward with the proposal, the AICPA encourages the IRS to change its proposal so that fewer taxpayers are affected and to rethink its most burdensome aspects.
On Jan. 26, the IRS announced it plans to make changes to how certain business taxpayers report uncertain tax positions (Announcement 2010-9). Under the proposal, business taxpayers with total assets of more than $10 million will be required to file new Schedule UTP, Uncertain Tax Position Statement, if they have one or more uncertain tax positions.
Draft Schedule UTP was released for comment on April 19 (Announcement 2010-30). It will be required for 2010 tax years and will 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, 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.
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.
While the IRS’ proposal does not change financial reporting rules, the AICPA believes it will work at cross-purposes to the financial reporting rules. The AICPA is concerned that because the IRS proposal requires disclosure of tax positions for which a financial statement reserve is required, this may influence the decision whether to establish a financial statement reserve. The AICPA recommends that the criteria for disclosing uncertain tax positions should be based solely on the technical merits of the tax position, and not on whether the company has recorded a financial statement reserve. The AICPA believes this would be more consistent with the IRS’ stated policy of restraint and would clearly separate uncertain tax position reporting from decisions made for financial statement purposes and recorded in tax accrual workpapers.
Increased Burdens and Costs
The AICPA disputes the IRS’ premise that reporting uncertain tax positions will involve merely transferring data from financial statements to the Schedule UTP and believes the actual process will be more complicated and burdensome. The requirement that taxpayers disclose the maximum amount of potential federal tax liability attributable to each uncertain tax position may require a new set of calculations beyond calculations made for financial statement purposes. The AICPA requests that taxpayers at least be allowed to report the results of these calculations as ranges, rather than requiring specific amounts for each item, and that they be allowed to use reasonable estimates of the tax benefits in determining the range.
Further, the AICPA recommends that the scope of the required disclosures 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. The AICPA also recommends that disclosure not be required for items that have an immaterial effect on federal tax liability or that are related to timing differences.
Small Business Impact
The AICPA also feels that the $10 million threshold should be significantly increased because the proposal will have a disproportionate affect on small businesses. Since many small businesses do not have FIN 48 expertise in-house, they will either end up making inadequate disclosures or be required to spend money to hire an external adviser to prepare disclosures. The AICPA reports that small businesses are concerned about the increased costs of audits and return preparation under the proposal, as well as the increased IRS scrutiny and liabilities to which inadvertent omissions will expose them.
To lessen the number of small businesses affected by the proposal, the AICPA recommends increasing the threshold to include only taxpayers who have assets in excess of $50 million and annual gross receipts in excess of $100 million.
When draft Schedule UTP was released, pass-through and tax-exempt entities were excused from the filing requirement for 2010. The AICPA recommends that pass-through and tax-exempt entities generally be exempted from the uncertain tax position reporting requirement.
Proposal Requires a Higher Reporting Level Than Mandated by Congress
Since IRC § 6662 already requires a taxpayer to disclose tax return positions for which the taxpayer does not have substantial authority, the AICPA does not think the IRS should set the disclosure bar higher than that set by Congress.
In addition to its policy recommendations, the AICPA also answered the eleven specific questions raised by the IRS in Announcements 2010-9 and 2010-17.
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