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In a surprising move, the IRS makes significant concessions on the disclosure of uncertain tax positions.
Marie Leone, CFO.com | US
September 24, 2010
The Internal Revenue Service has taken taxpayers' comments to heart and revised its proposal on uncertain tax positions in a way that is much more favorable to corporations. The final Form 1120, called Schedule UTP, and its instructions eliminate two draft requirements that companies argued were particularly onerous: the calculation and inclusion of a maximum tax adjustment for each position, and disclosures around positions that are not subject to an accounting reserve.
IRS commissioner Douglas Shulman announced the release of Schedule UTP on Friday in a speech delivered to the American Bar Association in Toronto. The agency has instituted a five-year phase-in period for filing the schedule, said Shulman.
Tax expert Robert Willens, who runs an eponymous consultancy in New York, says he is "surprised" by how responsive the IRS was to the comments it received on the draft schedule, in particular by eliminating the requirement to disclose maximum tax adjustments. "I had thought that this was a linchpin of the proposal and almost nonnegotiable from the service's viewpoint," he says.
The maximum tax adjustment is a company's best estimate of how much it could be on the hook should an entire deduction or credit be disallowed by the IRS. Such a number would give the IRS — or any potential plaintiff — insights into a company's reckoning of how much of its tax deductions are on shaky ground.
Under the final Schedule UTP, all but the smallest companies (those with less than $10 million in assets) will have to provide the IRS with an itemized list of uncertain tax positions and specify the nature of those positions. Companies will be required to rank their positions according to size, but reserve amounts will not be disclosed "anywhere on the schedule," noted Shulman.
Another "major concession" by the IRS is the elimination of the requirement to disclose the rationale for a position, says Willens. That was a top concern of tax directors and CFOs, he says: "No taxpayer wants to tip its hand, so to speak, regarding the legal rationale for taking a tax-return position prior to the actual audit of the tax return."
The IRS also did away with the reporting requirement for uncertain positions prior to 2010, even in cases in which a reserve is recorded. But the agency stuck to its guns with respect to reporting requirements related to transfer-pricing issues — a "predictable" move, says Willens. Excluding transfer-pricing positions would have "seriously undermined the objectives the IRS is seeking to accomplish with this initiative," he says.
Companies with more than $100 million in assets will have to file Schedule UTP beginning with 2010 tax years. Smaller companies will have up to five years to file the schedule, depending on their size.