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IRS Provides Additional Guidance on Reporting Uncertain Tax Positions

03.25.11

Beginning January 1, 2010, certain corporate taxpayers became required to file IRS “Schedule UTP,” where taxpayers must disclose tax positions for which the taxpayer or a related entity has recorded, or in some cases not recorded, a reserve on its financial statements.

The IRS recently published responses to a set of “frequently asked questions” with respect to Schedule UTP. These FAQs supplement the information contained in the IRS’s 2010 instructions (PDF) and the other guidance previously issued on Schedule UTP.

The FAQs provide guidance on the following issues relating to the completion of Schedule UTP:

  • Whether Schedule UTP requires a tax position to be disclosed if the corporation did not record a reserve on its financial statements because the corporation was “highly certain” of its tax position for purposes of FIN 48. The FAQs make clear that the FIN 48 threshold also satisfies Schedule UTP, meaning that such a position does not need to be disclosed.
  • Whether a tax position must be disclosed on Schedule UTP if the corporation records a reserve in an audited financial statement for such tax position because it expects to take such tax position in a return, but later eliminates the reserve in a subsequent interim financial statement issued before the filing of the return. The FAQs provide that if the subsequent interim financial statement is unaudited, then disclosure is required. However, if the subsequent interim financial statement is audited before the tax position is taken in a return, then the corporation does not need to report the tax position.
  • Whether a tax position must be disclosed on Schedule UTP if a return includes a net operating loss (NOL) or credit carryforward that includes a pre-2010 tax position for which a reserve has been recorded. The FAQs make clear that the use of a NOL or credit carryover in a post-2009 return does not have to be reported in this circumstance.
  • Whether interest and penalties must be included in determining the size and ranking of a tax position recorded on Schedule UTP. The FAQs provide that the size of a tax position is the amount of the reserve recorded for that position.

In addition to the above, the FAQs also set forth additional guidance from the IRS on changes to its policy of restraint that the IRS announced in Announcement 2010-76 (PDF). In summary, the FAQs focus on how the changes to the policy of restraint apply to requests for documents during all stages of the administrative process of determining the correct tax liability and well as with respect to discovery requests after the filing of a Tax Court petition.

OUR TAKE: The FAQs provide help understanding certain murky areas of previously published guidance. As such, the FAQs may help some companies from exaggerating their tax risk profile. However, like any new tax form, as both taxpayers and the IRS gain additional experience with Schedule UTP, it is likely that further guidance will be necessary.

 

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