Following earlier announcements foretelling their arrival, the Internal Revenue Service, with Announcement 2010-30 on April 19, 2010, released a draft schedule, Form UTP, and instructions for reporting uncertain tax positions. The IRS hopes to finalize the schedule and instructions for the 2010 tax year after comments are evaluated on the proposals. Comments were due by June 1, 2010.

1. Who would be required to file? As set forth in the draft instructions, the initial disclosure with respect to the 2010 tax year would be required 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. It is expected that, once this first-year program is evaluated, the disclosure requirements will be expanded to other 1120 filers, pass-through entities, and tax-exempt organizations.

2. What is an uncertain tax position? As set forth in the current drafts, an uncertain tax position includes a federal income tax position for which the taxpayer has recorded a reserve in an audited financial statement. It also includes a position where no reserve is reported either due to an asserted IRS administrative practice or because of an expectation to litigate the issue.

A tax position must be reported on a return only if the decision to record the reserve was made at least 60 days before filing the tax return. Decisions within 60 days are to be reported in the following year. Reporting requirements with respect to 2010 would not be required to include anything from the prior year.

The taxpayer must include as an uncertain tax position a position on which a related party has reported a reserve. A box is provided on the form to check if the taxpayer is unable to obtain the required information from the related party. A consolidated group would report uncertain tax positions for the whole group without any requirement to identify which member of the group reported the reserve.

3. For what years must an uncertain tax position be reported? The draft proposal requires that the tax position be reported in each year that a line item on that tax return would be adjusted if the position were not sustained. For example, an issue with respect to depreciation or amortization would have to be reported in each period in which the depreciation or amortization is claimed.

4. What information must be disclosed? The draft proposal would require identification of up to three Internal Revenue Code sections which relate to the position. Some commentators have suggested it might be a good idea to disclose additional code sections in the description of the position to avoid later assertions of non-disclosure.

The position must be described as either a temporary position or a permanent position, or both. A temporary position is one in which the position taken in the current year would be offset by positions taken in other years.

If the position relates to a tax position taken by a pass-through entity in which the taxpayer is a shareholder, member or partner, the taxpayer must report the employer identification number of the pass-through entity.

The draft proposal also requires disclosure of the maximum tax adjustment associated with the position. The MTA is the estimate of the maximum amount of potential federal income tax liability associated with the year for which the position was taken. An exception is provided for valuation or transfer-pricing tax positions. Valuation and transfer-pricing tax positions are to be identified as such and then ranked based on the amount of the reserve or the estimated adjustment to federal income tax if the position is not sustained.

Finally, a concise description of each position would be required. This should include 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. The IRS has stated that the description should be sufficient for the IRS to do a legal analysis of the position.

The amount of the reserves included in the financial statements are not required to be disclosed, nor are the taxpayer's assessments of risk.



Tax practitioners and taxpayers have raised several concerns about these potential new requirements. Will listed uncertain tax positions become a list of audit items for the IRS auditors? IRS personnel say it will become a basis for inquiry, but will not necessarily result in an audit of that position.

Others have observed that the proposals may affect current reserving practices. Some taxpayers put conservative reserves on items that they do not have time to fully analyze before releasing financials. Some only reserve big-ticket issues, while others tend to reserve big- and little-ticket items. The IRS says that positions with small MTAs will get little attention from the IRS auditors.

The draft proposal itself raises the issue of duplicate disclosure requirements. It provides that uncertain tax positions reported on the Form UTP need not also be disclosed on Form 8275 or Form 8275-R. The IRS invites further comments on how the disclosure should relate to other disclosures, such as Schedule M-3 and Form 8886 disclosures.

Taxpayers are concerned about the ability to quantify uncertain amounts and to provide concise descriptions of positions. Some tax practitioners have suggested that a large number of lengthy descriptions of positions might be a good way to get the IRS to cut back on its disclosure requirements.

Some commentators have expressed concern that the new requirements are an effort to obtain tax accrual work papers or privileged documents. The IRS has responded that issue identification is the objective, not an end run around its policy on tax accrual work papers.



Announcement 2010-30 represents another of several steps taken by the IRS and Congress to help the IRS do its job by requiring taxpayers to disclose and highlight the information of most interest to the IRS. Taxpayers become concerned that disclosures will invite the IRS to attack the position. The IRS says that disclosures will cause the IRS to look at the position, but not necessarily attack it.

The net result will be to enable the IRS to identify problems earlier than they have in the past. The taxpayers who used to rely on being the first to take advantage of a new strategy before the IRS has a chance to close the door may find that the IRS's door-closing abilities have been significantly enhanced by these proposed changes.

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