A company may take a position on its tax return in good faith, but due to the complexities of tax law, it’s never a sure thing that it will be sustained.The now two-year-old FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, establishes a “more-likely-than-not” threshold for the reporting of uncertain tax positions on financial statements. Under the rule, an uncertain tax position may not be recognized on the financial statement unless it is more likely than not that it will be sustained on its technical merits, and then it is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement.

However, the real issue with FIN 48 for private companies and smaller public companies is the cost associated with its adoption and ongoing compliance, according to Mark Friedlich, director of publishing for CCH. “For private companies and small public companies, it’s very difficult to find individuals in the workplace with FIN 48 experience,” he said.

Private companies, already the recipient of a year’s grace period for compliance, are hoping for another delay, according to Mike O’Connor, a partner in the Tax Department at New England regional firm Carlin Charron & Rosen LLP.

For public companies, FIN 48 went into effect for fiscal years beginning after Dec. 15, 2007. Private companies were granted a reprieve until December 2008. “Most of them pretty much still have their head in the sand,” he said. “They’re nervous about it, but they’re hoping that they won’t have to do anything about it.”

The problem is compounded for large corporations with operations in multiple jurisdictions, noted Martin B. Tittle, an Ann Arbor, Mich.-based international tax attorney.

“FIN 48 requires both an exceptional grasp of U.S. generally accepted accounting principles and a thorough understanding of the technical and administrative tax rules for every jurisdiction where the company operates,” he said. “For multinationals, it’s rare for any one person to have both those sets of knowledge for more than a few countries. Frequently, there will be countries where the tax work is done either by local accounting specialists who are not completely familiar with local tax rules or by local tax specialists who are insufficiently familiar with FIN 48. The challenge of bridging these gaps on an ongoing basis and in an environment where both tax rules and their application are changing is formidable.”

Small and midsized accounting firms can come face to face with FIN 48, according to Mary Ann White, executive editor of accounting and auditing products for the Tax & Accounting business of Thomson Reuters.

“There are a number of issues they may face,” she said. “One has to do with how the interpretation might be applied to S corporations, and state nexus issues. If a pass-through is not recognized in a state and the state asserts nexus, then questions arise as to how you account for any taxes that might be potentially payable.”


“Some private companies are talking about taking a GAAP departure,” she said. “Basically, they won’t follow GAAP, and therefore the statements on the financial report would say it’s a qualified opinion. The GAAP departure is limited to a particular circumstance. The user knows it’s not a disclaimer, that it only applies to one aspect.”

The Private Company Financial Reporting Committee, formed to make recommendations to FASB for non-public business entities, recently asked FASB to exempt private companies from all of the requirements of FIN 48.

“The outreach results clearly indicate that private company financial statement preparers and practitioners find the provisions of FIN 48 to be significantly challenging to prepare, audit, review or compile,” it stated. “Moreover, they find the incremental costs of complying with FIN 48 to be high. Also noteworthy is that a significant percentage of private company statement preparers, who responded to the PCFRC extended outreach, plan to take a GAAP exception in their financial statements related to FIN 48.”

If FASB does not decide to implement the PCFRC’s recommendation, the committee recommended that at a minimum, it indefinitely defer the effective date for private companies until the FASB-International Accounting Standards Board convergence project on income taxes is completed. That way, FIN 48 could be examined in light of the upcoming revisions to FASB Statement No. 109, which FIN 48 interprets.

“The PCFRC believes that the provisions of FASB Statement No. 109 should first be settled before private companies expend the effort and incur the costs of implementing FIN 48’s requirements, only to face further changes once this project is completed,” the committee said.

“Whatever date you consider, IFRS is not that far off,” observed Tom Ochsenschlager, vice president for taxation at the American Institute of CPAs. “The concern for private companies is why make them go through a fire drill to reach FIN 48 when they’ll have to turn around and go through a second iteration when IFRS comes into play?”

“Since they’re working on convergence, why make private companies jump through the hoop if they will then have to turn around and do something differently when IFRS comes into play?” echoed PCFRC chair Judy O’Dell. “When you look at the disclosures of the larger companies, they’re pretty vanilla — because of the size of the companies they get blended together. Private companies, on the other hand, may only have one tax uncertainty, and disclosing that really provides the IRS with a roadmap.”

O’Dell doesn’t expect any action on the PCFRC’s request until the end of the summer. “At this point, we won’t know until September. That may be too late, because CPA firms spend the summer doing implementation work for their clients.”

FIN 48 is likely to continue in some form as companies transition to IFRS, according to CCH’s Friedlich. “The general feeling is that FIN 48 and its equivalent will survive a move from U.S. GAAP to international standards, and that many if not all of the FIN requirements will continue to be relevant and enforced,” he said.

“Transfer-pricing issues have been the thorniest in terms of compliance,” he noted. “The ongoing concerns are that FIN 48 disclosures in financial reports will be and are in fact being used by IRS agents when they audit enterprises. There is a tremendous amount of tax risk and tax executives in the U.S. are extremely concerned about a potential worldwide liability.”

Friedlich noted that the more-likely-than-not standard employed by FIN 48 is similar to the preparer standards under Circular 230.

“That MLTN concept applies with respect to much of Circular 230, and has been made applicable to the new return preparer standards under Code Section 6694,” he said. “There’s really a very close interplay, and it’s critical that tax advisors and preparers become more familiar with the standard and make certain that they appropriately apply that standard when dealing with their own clients.”

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