Dealing with the IRS Ruling on Uncertain Tax Positions
Starting with their 2010 tax returns, companies with assets of at least $100 million will need to provide concise descriptions of their uncertain tax positions, or UTPs, to the IRS. An uncertain tax position is one for which a taxpayer has recorded a reserve within its financial statements. Also included under the rubric "UTP" are positions for which an organization has not recorded a reserve because it expects to litigate the matter.
Wed, February 02, 2011
Starting with their 2010 tax returns, companies with assets of at least $100 million will need to provide concise descriptions of their uncertain tax positions, or UTPs, to the IRS. An uncertain tax position is one for which a taxpayer has recorded a reserve within its financial statements. Also included under the rubric "UTP" are positions for which an organization has not recorded a reserve because it expects to litigate the matter.
The requirement to file Schedule UTP will phase in over several years. In 2012, companies with at least $50 million in assets will file Schedule UTP. Come 2014, the requirement expands to companies with $10 million in assets.
This requirement recognizes that many companies take positions on their tax return that they believe to be viable under the tax code, yet simultaneously record reserves in case the IRS views the matter differently, says Todd Reinstein, an attorney with Pepper Hamilton in Washington, D.C.
Of course, the requirement to disclose UTPs is nothing new for publicly traded companies in the U.S. As a result of ASC 740-10, formerly "FIN 48," or Accounting for Uncertainty in Income Taxes," public companies have for several years been required to account for their uncertain tax positions on their financial reports to the Securities and Exchange Commission.
Impact of Enron
As with many regulatory changes, this one was driven, at least in part, by the collapse of Enron Corp., Reinstein says. It was only after Enron declared bankruptcy in late 2001 that authorities discovered the company had taken some very aggressive tax positions. That prompted the FASB to ask for more transparency about the uncertain tax positions companies were taking.
At the time FIN 48 was issued, many companies were concerned that it would provide a roadmap to the IRS, says Wayne Corini, a partner and regional tax business line leader with BDO. With this requirement, the IRS appears to be requesting its own, more detailed roadmap.
Having this information readily available should allow IRS agents "to more quickly isolate material positions," within their audits, says Mike Dolan, director of the national tax office with KPMG, and former deputy commissioner with the IRS. That may allow the IRS to work more efficiently and even conduct more audits.
For the organizations preparing Schedule UTPs, the benefits are less clear-cut. Most already will have outlined much of what goes onto the Schedule within their financial statements; now it's a matter of providing the information within the IRS' format.
