IRS may modify Schedule UTP for uncertain tax positions

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The Internal Revenue Service may be changing Schedule UTP, the Uncertain Tax Position Statement, which corporate taxpayers file with their Form 1120 tax returns, because it doesn’t contain enough information to be useful in compliance efforts, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that the passage of the Sarbanes-Oxley Act in 2002 and the development of specific accounting standards, known as Financial Accounting Standards Board Interpretation No. 48, also known as FIN 48, require companies with a Securities and Exchange Commission filing requirement to reserve for, and report, on their tax uncertainties.

The IRS recognized an opportunity to use this newly available information and, starting in tax year 2010, created Schedule UTP. The IRS hoped to achieve greater certainty about a taxpayer’s tax obligations, more consistent treatment for taxpayers, and an efficient use of government and taxpayer resources by focusing on issues and taxpayers that pose the greatest risk of noncompliance. However, TIGTA found Schedule UTP doesn’t contain sufficient information to allow the IRS to achieve those original goals.

“The lack of detail and specifics related to the concise description of the reported tax position provide little more than a confirmation that certain issues exist,” said the report. “The weaknesses in the form provide for limited use by examiners and group managers in the field and by Large Business and International Division management and executives to strategically use the form during inventory identification and delivery. Without changes that would expand the details reported on the form, such as requiring more detailed descriptions of the reported tax position or dollar amounts of disclosed positions, the expectations and goals in implementing Schedule UTP will not be realized.”

TIGTA recommended the IRS LB&I Division, in coordination with the Treasury Department’s Office of Tax Policy, consider the feasibility of either modifying Schedule UTP to include more needed information to be useful for its intended purpose or removing the Schedule UTP filing requirement.

In response to TIGTA’s recommendation, IRS management plans, in coordination with the Treasury Department Office of Tax Policy, to consider the feasibility of modifying Schedule UTP to include more useful information. However, the IRS disagreed with the suggestion of removing the Schedule UTP filing requirement entirely.

“The IRS believes the due diligence filing requirements of Schedule UTP promote voluntary compliance with the LB&I filing population,” wrote Douglas O’Donnell, commissioner of the IRS’s Large Business and International Division, in response to the report. “The requirement to identify uncertain tax positions is consistent with financial statement reporting and provides taxpayers a mechanism to evaluate filing positions and compliance risk. As with Securities and Exchange Commission filing requirements for Financial Accounting Standards Board 48 (i.e., FIN 48), the knowledge that a reporting entity will be required to specifically report transactions with an analysis determining whether the position is ‘more likely than not’ to be sustained by the taxing authority provides both the IRS and taxpayers with a tool to improve voluntary compliance.”

O’Donnell acknowledged, however, the costs incurred by companies in preparing and filing Schedule UTP. He noted the IRS has received approximately 15,000 filings since Schedule UTP was first required in 2010, and approximately 20 percent of the time Schedule UTP identifies an unknown issue for the IRS so it helps improve the effectiveness of the IRS’s tax compliance efforts.

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Corporate taxes Financial reporting Tax forms Sarbanes-Oxley IRS TIGTA FASB