IRS Releases Final Schedule UTP and Related Announcements
Today the IRS released materials regarding the new reporting requirements for uncertain tax positions (UTPs).1 These materials (available through the links below) include:
- the final Schedule UTP, Uncertain Tax Position Statement;
- Instructions for Schedule UTP;
- Announcement 2010-75, Reporting of Uncertain Tax Positions;
- Announcement 2010-76, Requests for Documents Provided to Independent Auditors, Policy of Restraint, and Uncertain Tax Positions; and
- an IRS Directive for All Large Business and International Division Personnel from Steven T. Miller, Deputy Commissioner for Services and Enforcement, to All Large Business and International Division (LB&I) Personnel, regarding the Reporting of Uncertain Tax Positions (the “Directive”).
The materials reflect some significant changes from the draft Schedule UTP that was issued earlier this year. Many of these changes were made in response to taxpayer comments on the draft Schedule. The materials are voluminous. This Alert does not cover all of the important issues addressed in the materials, and we recommend that clients review these documents carefully. We will continue to analyze them as well.
Below are some of the notable aspects of the materials released today:
- Who must file Schedule UTP? For 2010, private or public companies with total assets of $100 million or more that issue or are included in audited financial statements and that file a Form 1120, 1120-F, Form 1120-L, or Form 1120-PC must file Schedule UTP. The Schedule UTP will be phased in for taxpayers with assets of less than $100 million. The asset threshold will be reduced to $50 million in 2012 and then $10 million in 2014. The IRS declined to exempt taxpayers in the CAP program from filing Schedule UTP.
- Ranking UTPs by Amount of Reserve. There are a number of changes to the information required to be reported on the Schedule UTP, as compared to the earlier draft. One of the most troubling changes in the final Schedule UTP is the new requirement for the company to rank its reported uncertain tax positions based on the amount of the tax reserve recorded for each position, and to specifically identify those positions for which the reserve exceeds 10% of the total reserves for all tax positions reported on the schedule. (The Schedule requires the taxpayer to check the “Major Tax Position” box for these items.) The IRS added this requirement in place of reporting the maximum tax adjustment for each UTP, which the draft Schedule UTP required. We find this new requirement to be problematic because it is not much different from asking for the risk-assessed number itself, which is privileged.
- Rationale Requirement Eliminated. The requirement to include the rationale for the UTP and the nature of the uncertainty in the description on the Schedule UTP has been eliminated. The final Schedule requires a concise description of the relevant facts affecting the tax treatment of the position and information to apprise the IRS of the identity of the tax position and the nature of the issue. The Instructions specifically state that the description should not include an assessment of the hazards of a tax position or an analysis of the support for or against the position. Announcement 2010-75 notes that these instructions are based upon and are consistent with the disclosures that taxpayers make for penalty-protection purposes on Form 8275.
- “Administrative Practices” Category Excluded. Final Schedule UTP eliminates the proposed reporting requirement for the “administrative practices” category of items that was included in the draft Schedule UTP. These are items for which a reserve would have been recorded but for a determination that the IRS has a practice of not challenging these items during an examination.
- Reporting of UTPs that Taxpayers Expect to Litigate. Final Schedule UTP retains the requirement to report tax positions for which the company did not record a reserve because it expects to litigate the position. The Instructions clarify that the items to be reported are those for which the company has determined that the probability of settling with the IRS is less than 50% and under the applicable accounting standards, no reserve was recorded because the corporation intends to litigate the tax position and has determined that it is more likely than not to prevail on the merits in litigation.
- Reserves Determined by Reference to Financial Statement Standards. The Instructions and Announcement 2010-75 clarify that the analysis of whether a reserve is recorded is determined by reference to decisions made for financial statement purposes. If the company determines that no reserve is required because the amount is immaterial for purposes of the audited financial statement, or that the tax position was sufficiently certain so that no reserve was required, the tax position is not required to be reported on Schedule UTP.
- Foreign Company Reporting. The Instructions provide definitively that a foreign company filing a protective Form 1120F must file a schedule UTP if it otherwise meets the threshold filing requirements. Further, for purposes of determining whether it meets the filing threshold based on asset value, the assets that are considered are those that would be reported on the balance sheet of the tax return if the company were to prepare the balance sheet on a worldwide basis. Thus, if a foreign company files a protective Form 1120F to preserve its ability to claim deductions should it later be found to have a U.S. trade or business, that company must file a Schedule UTP if it has one or more uncertain U.S. tax positions that must be reported on a Schedule UTP (including a position with respect to whether it maintains a U.S. trade or business).
- Expanded Policy of Restraint. Announcement 2010-76 provides that in conjunction with the final Schedule UTP requirements, the IRS is expanding its policy of restraint (now embodied in I.R.M. 4.10.20) beyond tax accrual workpapers to also include “particular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.” The Announcement states that if the taxpayer provides a document that is otherwise protected under the attorney-client privilege, section 7525, or the work-product doctrine to an independent auditor as part of an audit of the taxpayer’s financial statements, the IRS will not assert during an examination that the taxpayer waived the applicable protection by providing the document to the auditor. Citing I.R.M. 22.214.171.124, the Announcement states this policy will not apply to documents for which the taxpayer has waived the applicable protection by some other means and to requests for tax accrual workpapers where “unusual circumstances exist or the taxpayer has claimed the benefits of a listed transaction.” The IRS’s policy does not in any way affect the discoverability of documents in litigation or other contexts. The expanded policy of restraint will also allow taxpayers to redact some information from tax reconciliation workpapers relating to the preparation of Schedule UTP.
- Addressing Duplicative Reporting. Announcement 2010-75 provides that for positions other than reportable transactions, a complete and accurate disclosure of a tax position on Schedule UTP will be treated as if the corporation filed a Form 8275 or 8275-R and the corporation will not need to file Form 8275 or 8275-R to avoid accuracy-related penalties with respect to that position. The IRS is also studying whether Schedule UTP disclosures could also suffice for reportable-transaction-disclosure purposes. In addition, the IRS is forming a working group to study and revise Schedule M-3 to reduce the extent to which Schedule M-3 and Schedule UTP require duplicate reporting.
- How the IRS Will Process Schedule UTP. Without going into specifics, the Directive states that the IRS will establish a “centralized process” in the newly renamed Large Business and International Division (LB&I). The Directive states that the centralized process will enable LB&I to select issues and returns for audit, among other things. The directive also says that LB&I agents will receive training on Schedule UTP over the next year.
1 The IRS released these materials in conjunction with remarks by IRS Commissioner Doug Shulman to the American Bar Association in Toronto. His prepared remarks are available here.
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