Proposed Reg Would Permit IRS to Require Reporting of Uncertain Tax Positions

Preamble to Prop Reg 09/07/2010; Prop Reg § 1.6012-2

IRS has issued a proposed reg giving it the regulatory underpinning to require certain corporations to attach to their returns Schedule UTP (Uncertain Tax Position Statement), or any successor form, in accordance with forms, instructions, or other appropriate guidance issued by IRS.

Background. In Ann. 2010-9, 2010-7 IRB, IRS announced that it was developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns and requested comments by Mar. 29, 2010 (see Federal Taxes Weekly Alert 01/28/2010). The proposed schedule would require the annual disclosure of uncertain tax positions in the form of a concise description of those positions and information on the maximum amount of potential Federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer's risk analysis regarding its likelihood of prevailing on the merits). It would be filed with the Form 1120, U.S. Corporation Income Tax Return or other business returns.

In addition to positions for which a tax reserve must be established under FIN 48 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48, now codified in FASB ASC Topic 740-10 Income Taxes. Income Taxes, Accounting Standards Codification Subtopic 740-10, Fin. Accounting Standards Bd. 2010) or other accounting standards, uncertain tax positions would include any position related to the determination of any U.S. Federal income tax liability for which a taxpayer or a related entity hasn't recorded a tax reserve because (i) the taxpayer expects to litigate the position, or (ii) the taxpayer has determined that IRS has a general administrative practice not to examine the position.

In March, IRS released draft schedule UTP accompanied by draft instructions, along with Ann. 2010-30, 2010-19 IRB. The draft schedule and instructions provide that, beginning with the 2010 tax year, the following taxpayers with both uncertain tax positions and assets equal to or exceeding $10 million will be required to file Schedule UTP if they or a related party issued audited financial statements:

• Corporations required to file a Form 1120, U.S. Corporation Income Tax Return;

• Insurance companies required to file a Form 1120 L, U.S. Life Insurance Company Income Tax Return or Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return; and

• Foreign corporations required to file Form 1120 F, U.S. Income Tax Return of a Foreign Corporation.

For 2010 tax years, IRS won't require a Schedule UTP from Form 1120 series filers other than those identified above (such as real estate investment trusts or regulated investment companies), pass-through entities, or tax-exempt organizations. IRS says it will determine the timing of the requirement to file Schedule UTP for these entities after comments have been received and considered.

IRS received a substantial number of public comments regarding its UTP proposal, much of it critical (see article in Federal Taxes Weekly Alert 06/03/2010).

Justification for Schedule UTP. Preamble to Prop Reg 09/07/2010, carries a justification for IRS's proposal for affected corporations to file Schedule UTP with their returns. In essence, IRS's position is that to discharge its obligation to fairly and uniformly administer the tax laws, it must be able to quickly and efficiently identify those returns, and the issues underlying those returns, that present a significant risk of noncompliance with the Code. Currently, corporations aren't required to separately identify and explain the uncertain tax positions that are identified in the process of complying with generally accepted accounting principles (GAAP). Instead, IRS must select a return for audit and its agents must expend a substantial amount of effort to determine what uncertain tax positions might relate to the return.

IRS position is that corporations that prepare financial statements already are required by GAAP to identify and quantify all uncertain tax positions as described in FIN 48. Other corporations that file returns of income in the U.S. may be subject to other requirements regarding accounting for uncertain tax positions (e.g., International Financial Reporting Standards and country-specific generally accepted accounting standards).

Congress, through the Code, gives IRS broad authority and discretion to specify the form and content of returns, so long as it promulgates regs requiring persons made liable for a tax to file those returns.

New proposed regs. New Prop Reg § 1.6012-2(a)(4) essentially would provide the underpinning for IRS to require affected corporations to attach to their returns Schedule UTP (or any successor form), in accordance with forms, instructions, or other appropriate guidance issued by IRS. Prop Reg § 1.6012-2(a)(4) is proposed to apply for returns filed for tax years beginning after Dec. 15, 2009, and ending after the date that final regs are published.