IRS Makes Significant Concessions on Disclosure of Uncertain Tax Positions
Acknowledging tax payer concerns, the Internal Revenue Service (IRS) has revised its proposal on uncertain tax positions (UTPs) to be more favorable to corporations and eliminate particularly onerous requirements. Defined by the IRS as a federal income tax position for which a taxpayer or related party has recorded a reserve in an audited financial statement, UTPs have been a taxpayer concern since the IRS issued its original proposal in April.
IRS commissioner Doug Shulman announced the release of Schedule UTP in September during a speech to the American Bar Association in Toronto. He noted that the final schedule “addresses important concerns expressed by affected taxpayers and the practitioner and business community.”
Further, Shulman also states that the changes are expected to move the industry toward efficiency, earlier certainty and consistency of tax administration regarding corporate taxpayers.
The final Form 1120, called Schedule UTP, has eliminated draft requirements that companies argued to be particularly onerous: the calculation and inclusion of a maximum tax adjustment for each position, administrative practice positions and disclosures around positions that are not subject to an accounting reserve. Other changes include the five-year phase-in of the reporting requirement based on a corporation’s asset size.
This phase-in will provide smaller companies up to five years to file the schedule, depending on their size. Companies with more than $100 million in assets will have to file Schedule UTP beginning with the 2010 tax year.
“We believe these concerns principally arose from the fact that the draft instructions required Schedule UTP filers to provide the rationale for a position reported on the Schedule along with a description of the nature of the uncertainty related to that position,” said Shulman. “The final instructions eliminate these requirements and make it clear that a taxpayer need only disclose information sufficient to identify the issue and the relevant facts.”
While the IRS addressed a number of taxpayer comments and concerns, a recent KPMG Tax Governance Institute (TGI) survey revealed several others. Nearly half of senior executives polled considered a concise description of UTPs as defined by the IRS as their greatest UTP concern regarding uncertain tax positions. Other concerns include the IRS’ ability to effectively administer the UTP program (20 percent) and the scope of taxpayers required to file for UTPs under the new rule (15percent).
When asked which elements needed additional clarification, respondents had mixed feelings. Twenty percent identified a concise description, 18 percent identified multiyear positions and 17 percent identified ranking of reserves and expectation to litigate positions.
“While the IRS went to considerable lengths to ease corporate taxpayer concerns about specific elements of the original Schedule UTP proposal and incorporated many of the suggestions offered in comments submitted during the public comment period, the implementation of this new disclosure regime will invariably produce practical questions and issues,” said Hank Gutman, KPMG tax principal and director of the TGI and former chief of staff of the U.S. Congressional Joint Committee on Taxation. “It is not too early to begin an analysis of the potential impact of the Schedule.”
Under the final schedule, all but those companies with less than $10 million in assets will be required to provide the IRS with an itemized list of uncertain tax positions and specify the nature of those positions. Companies will also be required to rank their positions according to size, but reserve amounts will not be disclosed “anywhere on the schedule,” noted Shulman.
“Taken together, these changes … address important burden and reporting concerns raised by affected taxpayers and their representatives while still allowing us to achieve the proposal’s goals,” he said. “I believe that this significant change, made in response to comments we received, will continue to provide us with the information we need while at the same time addressing the concerns raised about privilege.”
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