In June we discussed the proposed Schedule UTP and instructions for reporting uncertain tax positions. The Internal Revenue Service received a number of comments on those proposals and, on Sept. 24, 2010, issued a final Schedule UTP and related materials for the 2010 year in Announcements 2010-75 and 2010-76. The final version makes a number of significant changes to the requirements in response to the input received.
WHO MUST FILE?
The original proposal required disclosure with respect to the 2010 tax year from corporations that have uncertain tax positions, own assets exceeding $10 million, issue audited financial statements, and are required to file a Form 1120, 1120L, 1120PC or 1120F. Many commentators expressed the view that the $10 million level was too low or should be phased in.
Announcement 2010-75 changes the asset test. Now the $10 million level is approached over several years. For 2010 tax years, only corporations with total assets equal to or exceeding $100 million must file Schedule UTP for the 2010 tax year.
The threshold is reduced to $50 million for the 2012 tax year and to $10 million starting with the 2014 tax year. The IRS is continuing to study whether to extend the reporting requirement to pass-through and tax-exempt entities. This change in any event will give smaller corporations considerably more time to gear up to comply with the new requirements.
The draft schedule required the calculation and reporting of the maximum tax adjustment (MTA) associated with an uncertain tax position. Exceptions were provided for valuation and transfer pricing positions, which required only a ranking based on the amount of the reserve adjustment. Many commentators stated that calculating the MTA would be a significant burden on taxpayers without providing much useful information to the IRS.
The final schedule drops the requirement to report the maximum tax adjustment. Instead, all positions are required to be ranked based on the federal income tax reserve recorded for the position and to designate those tax positions, if any, for which the reserve exceeds 10 percent of the aggregate amount of the reserves for all of the tax positions reported on the schedule. This change should significantly lessen the burden of preparing the new schedule.
In its proposed form, the schedule required a concise description for each position that included a brief statement of the type of tax at issue, the facts involved, the position taken on the return, the rationale for that position, and alternative positions that could be taken. Many commentators said that there was a clear disconnect between the IRS stating that it wanted only a fact-based response and a request for the rationale supporting the position. Even the IRS's own examples of concise descriptions did not seem to meet the stated requirements. Some suggested that taxpayers should hire outside counsel to draft concise descriptions that would read like legal briefs prepared for litigation.
In its final form, the requirement to include the rationale behind the position has been dropped. Now the required "concise statement" is to include sufficient facts to assess the tax position, but it should not include the taxpayer's assessment of the hazards of the position or the analysis supporting the position. This change should significantly simplify the preparation of the concise description and eliminate discussions about the need to hire outside counsel to draft the concise descriptions.
The proposed schedule required the disclosure of uncertain tax positions for which the taxpayer has recorded a reserve in an audited financial statement and also where no reserve is reported, either due to an asserted IRS administrative practice or because of an expectation to litigate the issue. Many commentators questioned whether the benefit of including administrative practice and expectation to litigate would benefit the IRS more than it would burden the taxpayers to provide it.
The IRS has now dropped the requirement to include positions for which there is no reserve due to administrative practice. The final schedule retains, however, the requirement to include positions where a reserve is not reported due to an expectation to litigate the issue. It will still require more effort to determine what needs to be reported on Schedule UTP than simply looking at the tax reserves reported on the audited financial statements, but dropping the administrative practice requirement constitutes a significant reduction of the burdens of determining what should be included.
The draft Schedule UTP provided that uncertain tax positions reported on Schedule UTP need not also be disclosed on Form 8275 or Form 8275-R. This is retained in the final version. The service has also stated that it will treat a complete and accurate disclosure on Schedule UTP as satisfying the disclosure requirements of Code Section 6662(i). The IRS remains open to looking at additional ways to reduce or eliminate duplicative reporting requirements.
Many commentators expressed concern about the effect of the Schedule UTP disclosure requirements on taxpayer privileges. Announcement 2010-76 attempts to respond to this by stating that the IRS is expanding its policy of restraint in connection with Schedule UTP, and that it will forgo seeking particular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.
The IRS has also issued internal guidance to its examination and research personnel outlining the various uses for the information reported on Schedule UTP.
The IRS has made significant modifications to Schedule UTP in response to taxpayer comments, more than most commentators had expected. The burden of the new requirements have been significantly lessened and/or postponed. The IRS has probably also helped itself with the changes by avoiding the risk of being overwhelmed with lengthy disclosures that could swamp its personnel and systems. We are likely to see continued modifications of the requirements in future years as the IRS evaluates the submissions that it receives for 2010.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
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