One of the dilemmas facing many accountants and tax preparers this tax season is the problem of how to account for uncertain tax positions and deal with them on the IRS’s new Schedule UTP.
The IRS introduced the Schedule UTP last September after hearing a volley of negative comments about its original wide-ranging proposal for disclosing dicey tax positions (see IRS Scales Back Uncertain Tax Position Requirements). The IRS had initially proposed that companies with over $10 million in assets should start disclosing their uncertain tax positions for the 2010 tax year, but decided instead to start phasing in the requirements over a five-year period, beginning with the largest corporations with $100 million or more in assets.
But accounting for uncertain tax positions is not necessarily a new thing, as users of FIN 48 know all too well. The Financial Accounting Standards Board issued FASB Interpretation No. 48 back in 2006, but FIN 48 has its own wrinkles of uncertainty.
The problem was discussed by some of the speakers at a series of talks and panel discussions Tuesday at the NYU/KPMG Annual Lecture on Current Issues in Taxation at the New York University School of Law.
KPMG partner Mark Bielstein noted that the threshold for recognizing the benefits of tax return positions in financial statements under FIN 48 is that they are “more likely than not” to be sustained by the taxing authority.
“The ‘more likely than not’ assertion is a positive assertion that the company believes they’re entitled to the economic benefits of that tax position and they think they’re going to prevail on that,” he said. “If it’s not ‘more likely than not,’ then the benefits of that tax position are not reflected in the financial statements.”
Unfortunately, double and triple negatives tend to lead to even more uncertainty, no matter how positive an assertion they are considered to be. That uncertainty about tax positions has extended all the way to the IRS.
“When FIN 48 came into effect, the IRS thought here’s a treasure trove of information that we’re going to be able to get from the publicly available financial statements, and that did not come into effect,” said Diana Wollman, a partner at the law firm Sullivan & Cromwell. “The IRS had a policy that it would ask for work papers, the background to the financial statements, when the corporation did something particularly egregious. What happened was that didn’t seem to work out too well for them, and they’ve been under a lot of pressure to continue to peek into those work papers, so they finally in 2010 came out with this idea of Schedule UTP. They said that we are not going to get into your thinking patterns. What we just want is for you to give us the breadcrumbs.”
The IRS used the sales pitch that the form would reduce the time it would take to find issues during an IRS audit and allow the agency and the company to work together more efficiently without having to dig around for the basic facts. The IRS asked for concise information on the form, and didn’t request the reasons why companies took their positions. Nevertheless, companies have to rank their tax positions by the amount the company reserves for settling them, which is kind of like ranking their dirty laundry according to which laundry is dirtiest, Wollman noted. The IRS also wants companies to disclose when they think the probability of settling is less than 50 percent, and record no reserves if the company expects during the litigation that it is more likely than not to prevail.
By limiting the initial tranche of companies expected to file Schedule UTP to those with over $100 million in assets, the IRS will be able to gauge how easily corporate America will be able to adjust to the new regime of disclosing uncertain tax positions.
“It will actually be a learning opportunity for the IRS to see how this goes down with the more sophisticated taxpayers who are capable of working through this, and it will present the IRS with a manageable amount of data,” said KPMG national director Michael Dolan. “They will be able to take the results of the UTP schedules for about 17,000 taxpayers and figure out what it does and doesn’t tell them.”
What it probably will tell the IRS is how uncertain most companies are about filling out the Schedule UTP in the first place.
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