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.

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.

Even companies that don’t prepare public financial statements should have been identifying and analyzing these positions all along, says Carl Fortner, an attorney with Foley & Lardner in Milwaukee, Wisc. The largest impact likely will be on smaller, private companies that lack the necessary reporting systems and are forced to implement them.

Simply filing the Schedule UTP, which is informational, should not automatically lead to higher taxes, Corini notes. On the other hand, it’s possible that the IRS will take a position that differs from that outlined by the taxpayer, and which the IRS wouldn’t have identified without the new schedule. That may boost a company’s tax bill.

Not surprisingly, some CFOs have expressed concerns about disclosing this information to the IRS. “The big question is: what use will the IRS make of the data?” says Dolan. A company that identifies a UTP that later is challenged has put itself on the defensive.

Also troubling is the fact that it is not yet clear just how disclosing an uncertain tax position to the IRS will affect attorney/client privilege, Reinstein says.

CFOs Weigh In

Just under half the 1,100 senior executives surveyed late last year by KPMG’s Tax Governance Institute expressed concern about the need to provide “concise descriptions” of their UTPs. One in five respondents were concerned about the IRS’ ability to administer the program.

At least a few CFOs say that it’s not the disclosure itself that concerns them, but the additional work. “We drive the ball straight down the middle of the fairway,” says Mark Eisele, vice president, chief financial officer and treasurer with Applied Industrial Technologies, a distributor of industrial products. “We try to comply 100 percent with the spirit of the law, and its word.”

At the same time, Eisele says that he’s experienced several occasions in which the IRS has taken positions that he views as being contrary to the tax law. As government agents, IRS auditors already carry a big stick. “I don’t want to give the regulators a bigger stick without any accountability,” Eisele says.

SureWest Communications, a provider of telecommunications services in the western U.S., also refrains from taking aggressive tax positions, so the risk that the disclosure may prompt some sort of action is small, says Dan Bessey, chief financial officer. Even so, his firm will have to resources meeting the new requirements. “I’m aggravated by the compliance, but not the risk,” Bessey says.

Indeed, all CFOs will need to make sure they understand and support the reasoning behind each tax position their companies take. “You can’t think, ‘What if the IRS never figures this out?’ You have to be comfortable (thinking) that whatever tax positions you have, the IRS will probably find out,” Reinstein says.

Karen Kroll is a Minnesota-based business and financial writer.