Square-Off: Are Corporate Cyber Defenses Adequate?

It's not just about the technology, stupid. That's the collective message of the four expert commentators in this CFO Square-Off opinion forum, which addresses the issue of how CFOs and their corporations should be addressing cybersecurity in the face of rapid advances on the hacking front. Instead, finance chiefs should be focusing on their companies' systemic risks rather than just software. However, many companies are failing to address cybersecurity adequately because they tend to underva ..

Nearly half of the 1,100 senior executives polled in a recent survey claim that new disclosure rules for uncertain tax positions will create tensions among their audit firms, tax advisers, and tax departments. Indeed, 47% expect concerns to grow as companies begin to file the Internal Revenue Service’s new Schedule UTP, according to the survey, which was conducted during a Webcast this month by KPMG’s Tax Governance Institute.

The IRS defines an uncertain tax position as a federal income-tax position for which a company or related party has recorded a reserve in its audited financial statements. The definition also includes positions for which no reserve has been recorded because the taxpayer expects to litigate the issue. Companies falling into one of these categories must attach a Schedule UTP to their tax returns.

The IRS released its final version of Schedule UTP, as well as related disclosure guidance, in late September. The new rules require affected companies to provide an itemized list of uncertain tax positions and specify the nature of those positions. Companies are also required to rank their positions according to size of the reserve.

The survey also reveals that 28% of the respondents are concerned that IRS examining agents will use the schedule to propose audit adjustments without discussion, while 25% believe there will be an increase in IRS audits stemming from the information disclosed on the form.

Further, the poll highlights an uneasy feeling among respondents sparked by the expanded policy of restraint that was included in IRS guidance. Since the IRS began discussing the update to the rules, company executives have claimed that a broader policy would cause them to forfeit the privileged status they enjoy with regard to tax accrual work papers. The survey results underscore their anxiety, with 42% expecting that IRS agents will demand information that may impinge on privilege. Nevertheless, 45% of the respondents are unsure how the new disclosures would affect privilege, with the same group pointing out that they are confident in their ability to resolve the issue with the IRS.

Almost half (44%) of the respondents say their biggest concern related to the new rules is the prospect of having to provide “concise” descriptions of their uncertain tax positions. Meanwhile, 20% cite the IRS’s ability to effectively administer the uncertain tax position program as a major concern, and another 15% are most concerned about the scope of taxpayers required to file positions under the new rule (any corporation with more than $10 million in assets).

The IRS did throw a bone to corporations when it eliminated from the final rules the requirements to disclose reserve amounts, disclose the rationales for positions, and retroactively report uncertain tax positions for periods prior to 2010. Still, although the agency “went to considerable lengths” to ease corporate concerns, implementing the new disclosure regime “will invariably produce practical questions and issues,” says Hank Gutman, director of the Tax Governance Institute.

Judging by the survey results, the IRS needs to clarify several aspects of the new rules before the first wave of companies (those with more than $100 million in assets) are required to use Schedule UTP with their 2010 tax returns. For example, 20% of the respondents think “a concise description” needs an additional explanation, while 18% think “multi-year positions” lacks a good definition. Similarly, 17% each want more clarity around “ranking of reserves” and “expectation to litigate” positions.

The survey also finds that 39% of the respondents say their company has already started the necessary analysis and documentation for complying with Schedule UTP. It’s likely the companies that are knee-deep in planning are large and midsize entities, considering that large companies have to comply first. Smaller companies have more time to prepare: corporations with assets between $50 million and $100 million must file Schedule UTP beginning with the 2012 tax year, while companies with assets between $10 million and $50 million are not required to use the new form until the 2014 tax year.

Interestingly, 48% of the respondents do not believe any steps are necessary to reduce the uncertainties that are required to be reported on their 2010 Schedule UTP. However, 29% say Schedule UTP will increase their interest in prefiling treatments — meaning that these respondents will look for more certainty regarding their positions by using IRS prefiling agreements and advanced pricing agreements, as well as by participating in the agency’s compliance assurance process.

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