Internal Revenue Service Commissioner Doug Shulman said Friday that the IRS has been listening to complaints about its plans to require companies to disclose their uncertain tax positions and is relaxing some of the original proposals while phasing in the schedule over five years.

In addition to the five-year phase-in period, there will be no reporting of a maximum tax adjustment, no reporting of the rationale and nature of uncertainty in the concise description of the position, and no reporting of administrative practice tax positions.


Starting with the 2010 tax year certain corporate taxpayers under the jurisdiction of the IRS’s Large Business and International Division will be required to file a Schedule UTP with their Form 1120. Schedule UTP requires the disclosure of a taxpayer’s uncertain tax positions and is intended to reduce the time it takes to find issues; ensure that the IRS and taxpayers spend more time discussing the law as it applies to their facts, rather than looking for information; identify areas of uncertainty requiring guidance; and help prioritize selection of issues and taxpayers for examination.

After receiving comments from worried companies, their accountants and attorneys, along with various industry groups, the IRS announced Friday that it is expanding its policy of restraint in connection with its decision to require certain corporations to file Schedule UTP and will forgo seeking particular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.

In addition, the IRS released the guidance it is providing to the examiners and other personnel in its Large Business and International Division who will be working with corporate taxpayers on compliance, along with a final version of Schedule UTP and revised instructions for filling it out.

The IRS released draft versions of the form and instructions in April and solicited comments at that time. In remarks before an American Bar Association meeting in Toronto, Shulman described some of the changes in the IRS’s plans.

Some of the comments concerned the technical aspects and burden associated with filing the schedule, including who should have to file the new schedule beginning with the 2010 tax year.

“We initially proposed that it should be all companies with over $10 million in assets who issue audited financial statements,” said Shulman. “We heard concerns that this was too much too soon for smaller companies. In response, we have instituted a five-year phase in for filing the schedule. The largest corporations – those with $100 million or more in assets will file beginning with 2010 tax years, those with $50 million in assets beginning two years later, and those with $10 million in assets beginning two years after that. This will give corporations with total assets under $100 million additional time to comply with the new reporting requirement.”

The IRS is also relaxing the proposed requirement that Schedule UTP filers include a calculation of the Maximum Tax Adjustment, or MTA, for each tax position on the schedule.

“We felt we needed to size issues in order to prioritize audit selection and issue focus,” Shulman explained. “However, we asked taxpayers if there was another way to ascertain a sense of materiality or order of magnitude. We received many comments on this proposed requirement that on the whole expressed two basic concerns: (1) that the requirement was burdensome because an MTA was not currently being calculated; and (2) that the MTA would in many cases be significantly greater than any potential adjustment with respect to an issue – giving the IRS a distorted view related to the risk of particular issues.”

After listening to the concerns, the IRS has decided to eliminate the MTA requirement as a means to quantify the reported positions. Instead of assigning a specific maximum tax adjustment to a position, the final Schedule UTP requires a filer to rank its UTPs from highest to lowest based on the size of the position. Taxpayers will use U.S. federal income tax reserve amounts to rank the positions on the schedule, but will not be asked to provide reserve amounts anywhere on the schedule.

The IRS also heard concerns about a requirement to identify positions that a taxpayer did not reserve for either because of a taxpayer’s expectation to litigate the issue or because of an administrative practice of the IRS. Shulman said the IRS decided to eliminate the requirement to report so-called “administrative practice” positions, but determined that the information provided by the “expect to litigate” category was necessary to meet the IRS’s goals. However, the IRS clarified the instructions to respond to concerns that the category could have been read more broadly than it was intended and could require disclosure of highly certain or immaterial positions.

Other comments concerned how the proposal impacted privilege and the IRS’s long-standing policy of restraint. The IRS received comments about the potential sensitivity of the requirement for Schedule UTP filers to provide a concise description for all uncertain tax positions included on the Schedule UTP. The comments raised concerns that the disclosure of tax positions on Schedule UTP could enable adversaries to raise questions of waivers of privilege with respect to confidential communications related to the disclosed tax positions. The draft instructions had 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. After listening to the concerns, the IRS eliminated those requirements from the final instructions and made it clear that a taxpayer only needs to disclose information sufficient to identify the issue and the relevant facts. In addition, the instructions now specifically state that the concise description should not include information related to the corporation’s assessment of the hazards of a tax position or an analysis of the support for or against the tax position, Shulman noted.

The IRS also released an announcement to clarify the restraint policy. The announcement provides that disclosing issues on the Schedule UTP does not otherwise affect the protections afforded under the policy of restraint, according to Shuilman. It also provides that drafts of issue descriptions and information regarding quantification or ranking of issues are protected under the policy. In addition, the IRS has adopted a policy that we will not seek documents that would otherwise be privileged, even though the taxpayer has disclosed the document to a financial auditor as part of an audit of the taxpayer’s financial statements.

“These changes are designed to reassure taxpayers that we are not seeking their legal analysis or risk assessments,” said Shulman. “We are instead seeking issue identification that will help accomplish our shared goals of efficiency, certainty, and consistency that I described earlier. I remain committed to the important taxpayer protections afforded by the longstanding IRS policy of restraint and under existing privilege laws.”

Shulman acknowledged that other comments raised concerns about how the IRS would use the information it receives on Schedule UTP.  Many of the comments voiced anxiety about how IRS agents would use the information reported on the schedule during examinations.

To address those concerns, and make clear its expectations for how the information should be used, the IRS released a directive to the field that provides initial guidance to the IRS personnel who will be on the front lines administering the new UTP reporting requirements.

“The directive makes clear that we expect examiners to engage with taxpayers early in the process to eliminate uncertainty as quickly as possible, whenever possible,” said Shulman. “This is key to our overall philosophy and shared goal of creating certainty sooner and being more efficient and effective. Also, over the next year, our examiners will receive special training on the handling of Uncertain Tax Positions.”

In addition, a centralized process or triage team will be established to review UTPs and to determine their proper treatment. “We know that Uncertain Tax Positions are uncertain for a number of reasons,” said Shulman. “There may be ambiguity in tax law and a lack of published guidance. Our triage team will identify trends of areas of uncertainty, and this will become an important source of inputs to our guidance pipeline.”

The directive to the field also reinforces longstanding principles of fairness and impartiality, he added.

Some comments also expressed concerns that the reported UTP information would be automatically disclosed to foreign governments under treaties or information exchange agreements, Shulman noted.

“Let me assure you that there will be no automatic release of UTP information to other governments,” he said. “Our treaties and information exchange agreements do not require disclosure of information in cases in which there is no reciprocity, so it would be very, very rare to exchange such information unless the requesting government has similar information it can make available to the IRS.  Further, even if reciprocity did exist, we would consider other factors in determining whether to disclose the information, including the relevance of the information to the foreign government, which in many cases would not be present.”

Shulman said the IRS has also been working on speedier issue resolution for corporate taxpayers, including through its Compliance Assurance Program, or CAP.

“In exchange for more openness and transparency on the corporate taxpayer’s part, we help resolve issues early and ensure accurate returns are filed,” he said. “Taxpayers who are transparent with us get certainty with respect to their obligations at the time their return is filed, rather than waiting for the regular examination.” The IRS has also made changes in its Fast Track Settlement program and Fast Track Appeals function to make them work better and more efficiently.

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