IRS Proposes Disclosure of Uncertain Tax Positions
Tax Law Update 02/02/10 Thomas J. Phillips, Jeffrey B. Fugal
On January 26, 2010, the Internal Revenue Service ("IRS") announced - in Announcement 2010-9 ("Announcement") - its intention to require corporations and other business taxpayers with total assets in excess of $10 million, and who have financial statements prepared in which federal income tax reserves are computed under FASB Interpretation No. 48 or other accounting standards relating to uncertain tax positions, to disclose "uncertain tax positions" on their federal income tax returns. The reporting would require corporate taxpayers subject to the proposed rules to provide an annual schedule that contains a description of each uncertain tax position for which the taxpayer or a related entity has recorded a reserve in its financial statements, as well as a statement of the maximum amount of the potential federal income tax liability associated with each such position. The proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts. However, the IRS can compel the production of this information.
The proposed schedule would be filed with Form 1120 or other business tax returns. It would require taxpayers to provide a concise description of each uncertain tax position for which the taxpayer - or related entity - has recorded a reserve in its financial statements and the maximum amount of potential federal income tax liability attributable to each position. Reportable uncertain positions would also include any position related to the determination of any U.S. federal income tax liability for which a taxpayer - or a related entity - has not recorded a tax reserve because the taxpayer expects to litigate the position, or the taxpayer has determined that the IRS has a general administrative practice not to examine the position.
The description of each uncertain tax position would need to contain sufficient detail so the IRS could determine the nature of the issue. Furthermore, the IRS contemplates that the description would include the rationale for the position and a concise general statement of the reasons for determining that the position is an uncertain tax position. To be sufficient, the description would need to contain:
- The Internal Revenue Code Sections potentially implicated by the position;
- A description of the taxable year or years to which the position relates;
- A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
- A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
- A statement whether the position involves a determination of the value of any property or right; and
- A statement whether the position involves a computation of basis.
Additionally, the schedule would require a taxpayer to specify for each uncertain tax position the entire amount of U.S. federal income tax that would be due if the position were disallowed in its entirety on audit. This amount would include the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction or credit if the position were not sustained.
The Announcement does not specify an effective date. However, the IRS intends to publish the new schedule as quickly as possible and mandate that the new schedule be filed with returns filed after the release of the schedule. Additionally, the IRS is evaluating options for penalties or sanctions to be imposed when a taxpayer fails to make adequate disclosure of the required information regarding its uncertain tax positions. One option being considered by the IRS is to seek legislation imposing a penalty for failure to file the schedule or to make adequate disclosure.
The IRS has requested comments on the proposed reporting requirements and schedule which must be submitted by March 29, 2010.
This update is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact one of the authors of this update, Jeffrey B. Fugal, at (602) 229-5257 / firstname.lastname@example.org, Thomas J. Phillips, at (414) 277-5831 / email@example.com or your Quarles & Brady attorney.