New Schedule UTP (Uncertain Tax Position) Reporting Requirements
Proposed regulations give the IRS regulatory authority to require taxpayers to attach a Schedule UTP (Uncertain Tax Position) to their income tax returns. The IRS recently issued Announcement 2010-75 to make changes to the proposed Schedule UTP filing requirements and address commentator criticism and concerns. Below are the updated reporting requirements as updated by the recent IRS Announcements.
Private businesses issuing audited financial statements in accordance with GAAP have been required to adopt FASB Interpretation No. 48, Accounting for Uncertainty in Income Tax (FIN 48, now codified in ASC 740-10) for tax years starting after December 15, 2008 (Public companies were required to adopt as of December 15, 2006). FIN 48 required taxpayers to identify and quantify uncertain tax positions taken in their income tax returns for financial accounting purposes. Previously, the IRS did not require uncertain positions identified in the FIN 48 analysis to be disclosed. However, in January 2010 the IRS began considering changes to reporting requirements regarding taxpayer uncertain tax positions in order to improve tax compliance and administration. When public comment was requested, the IRS received substantial critical comments regarding the proposed disclosure requirements. In response, the IRS issued Announcement 2010-75, which allows a phase-in of the reporting requirements and addresses several reporting concerns raised by commentators.
IRS Justification for Schedule UTP
The IRS’s position is that to discharge its obligation to fairly and uniformly administer the tax laws, it must be able to quickly and efficiently identify those returns (and the issues underlying those returns) that present a significant risk of noncompliance with the Internal Revenue Code (the Code). Currently, corporations aren’t required to separately identify and explain the uncertain tax positions that are identified in the process of complying with generally accepted accounting principles (GAAP). Instead, the IRS must select a return for audit and its agents must expend a substantial amount of effort to determine what uncertain tax positions might relate to the return.
The IRS’s position is that corporations that prepare financial statements already are required by GAAP to identify and quantify all uncertain tax positions as described in FIN 48. Other corporations that file returns of income in the U.S. may be subject to other requirements regarding accounting for uncertain tax positions (for example, International Financial Reporting Standards and country-specific generally accepted accounting standards).
Congress, through the Code, gives the IRS broad authority and discretion to specify the form and content of returns, so long as it promulgates regulations requiring taxpayers to file those returns.
New Proposed Regulations
Proposed regulations provide the underpinning for the IRS to require affected corporations to attach to their returns Schedule UTP (or any successor form), in accordance with forms, instructions, or other appropriate guidance issued by IRS. The IRS expects to promulgate final regulations by the end of 2010.
Who Must File
At least initially, not all enterprises required to adopt FIN 48 are subject to the new UTP Schedule filing requirements for 2010. The following taxpayers may be subject to the Schedule UTP filing requirements:
- Corporations required to file a Form 1120, U.S. Corporation Income Tax Return;
- Insurance companies required to file a Form 1120 L, U.S. Life Insurance Company Income Tax Return or Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
- Foreign corporations required to file Form 1120 F, U.S. Income Tax Return of a Foreign Corporation.
Announcement 2010-75 changed the filing requirements as originally reported in IRS Announcement 2010-9. The original Announcement indicated taxpayers with assets in excess of $10 million would be subject to the reporting requirements. The recent Announcement allows a phase-in for corporations subject to the reporting requirements, based on the corporation’s total assets, as follows:
- Assets greater than $100 million in 2010: Schedule UTP must be filed with 2010 tax return;
- Assets greater than $50 million in 2012: Schedule UTP must be filed with 2012 tax return; and
- Assets greater than $10 million in 2014: Schedule UTP must be filed with 2014 tax return.
Information Required by Schedule UTP
The originally proposed Schedule UTP required corporations to disclose uncertain tax positions in the form of a concise description of those positions and disclosure of the maximum amount of potential Federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer’s risk analysis regarding its likelihood of prevailing on the merits). Due to unfavorable taxpayer comments these disclosure requirements were changed. The new Schedule UTP disclosure requirements are as follows:
- UTPs must be disclosed if reserved on an audited financial statement under an applicable financial accounting standard or if not reserved because of an expectation to litigate the position.
- Taxpayers must rank the UTPs according to the amount of federal income tax reserve (including interest and penalties) recorded in the financial statement. But the amount of the reserves need not be disclosed. Taxpayers must also indicate any reserve that exceeds 10% of the aggregate of all reserves reported on the schedule.
- Positions for which no reserve was created based on an expectation to litigate need not be quantified and may be assigned any rank by the corporation.
- A concise description of each UTP must be provided including a description of the facts, the nature of the tax issue, and information to reasonably apprise the IRS of the identity of the issue.
Penalties for Non-Compliance
To date, instructions for the Schedule UTP do not provide specific instructions regarding penalties for non-compliance. The IRS intends to review the completed schedules and to take appropriate “enforcement action.”
Businesses should talk with their tax advisors to consider how the recent IRS reporting requirements may impact them.