Uncertain Tax Positions Lure IRS Agents, Lawyer Claims

Despite previous IRS statements, agents are combing corporate reporting of uncertain tax positions to grab more revenue.
David KatzOctober 23, 2014

Contrary to previous assurances by the Internal Revenue Service, IRS agents are using corporate financial reports of uncertain tax positions as a tool to go after more tax revenues, a corporate tax lawyer says.

IRS_SignUsing reports in 10-Ks and 10-Qs on uncertain tax positions that are required under Financial Accounting Standards Board Interpretation No. 48, IRS field examiners are requesting supporting documents in a way that contradicts previous statements about IRS policy, according to Joseph M. Doloboff, a tax lawyer at Blank Rome and a former deputy tax legislative counsel for the U.S. Department of Treasury.

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Despite reported assurances by top IRS officials as well as a policy statement that agents would exercise restraint in using public disclosures of uncertain tax positions as a springboard to deeper probes, “what’s happened is that, unfortunately, especially for public companies, the examining agents go right for that disclosure and they ask for it very early on in the audit, despite what their superiors said a number of years ago,” says Doloboff.

In the run-up to the September 24, 2010, announcement of a new tax policy requiring certain business taxpayers to report uncertain tax positions on their tax returns, such tax officials as Donald L. Korb, then IRS chief counsel, and Robert Adams, then a senior IRS adviser, reportedly gave assurances at tax law conferences that while 10-Ks would be fair game for agents considering uncertain tax positions, the audit work papers behind the financials might be protected by the IRS restraint policies.

For the year 2010, many corporations had to begin filing IRS Schedule UTP, which requires them to provide “a concise description of each uncertain tax position for which the corporation or a related entity has recorded a reserve in its financial statements, or for which no reserve has been recorded because of an expectation of litigation.” The positions are identified by corporations while they prepare financials under FIN 48 and other relevant FASB standards.

Shiver Me Timbers

That requirement, however, brought up a concern that sent shivers through the ranks of corporate tax attorneys. As they review and verify the financials of their clients for compliance with FIN 48, independent auditors might ask for copies of legal opinions and other documents to support the audit. Could IRS agents, in the course of their own audits, ask for those very revealing and currently confidential documents?

To allay those concerns, the IRS issued a statement of its “Policy of Restraint” concerning such document requests on the same day that it articulated its stance on uncertain tax positions: If a document is protected under attorney-client privilege, tax-advice privilege, or the doctrine protecting the confidentiality of the work product of independent auditors, and it’s provided to an independent auditor as part of the taxpayer’s audit, “the Service will not assert during an examination that privilege has been waived by such disclosure,” according to the restraint policy.

Doloboff contends that IRS agents aren’t adhering to that policy, however. For example, he cites two recent situations in which IRS examiners, during the tax audit of two of his corporate clients, have had transactions identified and questioned “based upon the uncertain tax positions which the taxpayer had taken and which the agent asked for as part of the very first documents that they requested when they came into the audit,” he says.

“We’re not talking about six months into the audit,” the lawyer added. “We’re talking about two weeks within the audit beginning, that when the agent listed the documents that they wanted, included was the uncertain tax positions taken by the taxpayer… And I found that to be very disturbing.”

Doloboff said that he told one of the agents “that it was my understanding that FIN 48 Uncertain Tax Positions were not to be used as a generalized audit tool. Her response was that there was nothing in her directions from her manager that prohibited her from asking for those documents and, therefore, she did so as a matter of course.”

Such requests are placing corporate taxpayers on the horns of a dilemma about how to answer them, according to the attorney. On one hand , refusing to provide them to an IRS agent on the grounds that they’re privileged only tends to raise suspicions and spur the agent to dig deeper. On the other hand, privileged tax opinions often contain arguments the IRS would be likely to make if they knew the facts contained in them. “So you’ve made your arguments for them,” says Doloboff.

Photo by Joshua Doubek