UNCERTAIN TAX POSITIONS (UTP)

 In January 2010, the Internal Revenue Service (the Service, or IRS) put taxpayers on notice that it was considering changes to the reporting of Uncertain Tax Positions (UTPs). The Service developed Schedule UTP, which requires a specified class of corporations 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. These uncertain tax positions are identified while preparing financial statements under applicable accounting standards. The Service is requesting this information to further transparency in tax reporting.

In a recent speech, Commissioner Douglas Shulman stated that transparency is essential to the successful operation of the self-assessment tax system. According to the Commissioner, implementing the filing of a Schedule UTP is expected to provide greater certainty regarding a taxpayer’s tax obligations, consistent treatment across taxpayers, and more efficient use of government and taxpayer resources by focusing on issues and taxpayers that pose the greatest risk of tax noncompliance. Of course, the filing of a Schedule UTP allows the Service to obtain key information regarding uncertain positions and, thus, prioritize issues and taxpayers for examination.

Although taxpayers and practitioners have raised a number of issues and concerns regarding the disclosure requirements, the IRS has pressed forward with the initiative, and on September 7, 2010, the Service released proposed regulations requiring the filing of Schedule UTP. The Service also released the final UTP Schedule and Instructions effective beginning for the 2010 tax years.

Penalties

 The final instructions do not provide specific instructions regarding penalties. The Service intends to review compliance regarding how the schedule is completed by corporations and to take appropriate enforcement action, including the possibility of opening an examination or making another type of taxpayer contact, in those instances in which there appears to be a failure to complete the schedule or a failure to report whether the corporation is required to complete the schedule.

Who Must Report

 Generally, a corporation is required to file Schedule UTP with its tax return and disclose certain positions if the corporation

(1) files Form 1120 (or related forms for foreign corporations, life insurance companies, or property and casualty insurance companies),

(2) meets a phased-in, total assets threshold, and

(3) has issued (or a related party has issued) an audited financial statement that covers all or a portion of the corporation’s operations for the tax year. The positions to be reported include both positions for which the corporation recorded a reserve in the audited financial statement and also positions for which no reserve was recorded based on the taxpayer’s expectation to litigate the position or IRS administrative practice of not challenging the position. Reporting is required if:

      a) a reserve was recorded or the decision was made not to record a reserve based on the expectation to litigate and

      b) the position was taken on a return, regardless of the order in which these events occur.