Canada: IRS Announces Major Proposal To Require Mandatory Disclosure Of Uncertain U.S. Federal Income Tax Positions

In a fundamental development, the Internal Revenue Service (IRS) announced a proposal on January 26, 2010 that would require taxpayers to identify and report, on their annual income tax returns, uncertain tax positions they have taken. In addition, taxpayers would be required to disclose to the IRS the magnitude of the exposure if the position were to be disallowed. This announcement, formally issued in IRS Announcement 2010-9 (the Annoucement), was discussed by Douglas Shulman (Commissioner of the IRS) during his remarks to the New York State Bar Association (NYSBA) Tax Section on January 26. The Commissioner indicated that this proposal was part of an overall plan that would allow the IRS to "work smarter" and that the objectives of the proposal were to reduce the time it takes for agents to identify issues on audit and to help the IRS prioritize the selection of issues that it wishes to examine during audit, thereby helping the IRS make better use of its limited resources. The IRS has requested public comments on the proposal by March 29, 2010. If the proposal is implemented, it would represent an important transformation of the manner in which tax information is conveyed to the government and of the manner in which IRS audits would be conducted.

Who is Required to Disclose and What Constitutes an Uncertain Position?

Announcement 2010-9 indicates that the IRS is developing a Schedule that would be attached to the taxpayer's annual income tax return. The Announcement provides that this Schedule would be required to be filed by a "business taxpayer" (which presumably would include most corporations – even holding corporations – as well as partnerships and LLCs) if the taxpayer (i) has total assets in excess of $10 million, and (ii) has taken at least one uncertain tax position of a type required to be disclosed on the proposed Schedule. While the determination of what constitutes an uncertain tax position is not yet fully clear, it appears that the proposal requires, at a minimum, disclosure of each discrete U.S. federal income tax position that is included in a tax reserve that the taxpayer (or, importantly, a related person) is required to establish for accounting purposes under FASB Interpretation No. 48 ("Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109") or any other generally accepted accounting standard, such as International Financial Reporting Standards (IFRS). In addition to this, the Announcement would also require disclosure of any U.S. federal income tax position for which a tax reserve is not required to be established because either (a) the taxpayer expects to litigate the issue, or (b) the taxpayer has made a determination that the IRS has a general administrative practice not to examine the position.

For example, based on the rules outlined in the Announcement, it appears that a wholly-owned U.S. corporate subsidiary of a Canadian parent corporation (that is required to prepare audited financial statements in accordance with Canadian generally accepted accounting principles or IFRS) would be required to disclose any U.S. tax positions taken by the subsidiary that form part of the parent's tax reserve, assuming that the U.S. subsidiary has more than $10 million in total assets.

What Information Would the Taxpayer be Required to Disclose?

A taxpayer that is subject to the proposal would be required to file a Schedule with its tax return that would include the following information:

  • A concise description of each uncertain tax position in sufficient detail so that the IRS can determine the nature of the issue and understand the reasons for determining that the position is an uncertain tax position;
  • An indication of the U.S. Internal Revenue Code sections potentially implicated in the position;
  • 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;
  • For each separate uncertain position, the taxpayer is required to specify the maximum amount of U.S. federal income tax liability that would be due if the position were disallowed in its entirety; and
  • A statement whether the position involves a computation of basis.

The Announcement states that the proposal does not require a taxpayer to disclose its risk assessment or tax reserve amounts but cautions that the IRS has the ability to issue a summons requiring the production of this information. The IRS has indicated that it intends to retain its policy of restraint (articulated in IRS Announcement 2002-63) as it relates to requests for tax accrual workpapers. In his remarks to the NYSBA, Commissioner Shulman explained that a "concise" description of the uncertain position was intended to mean "a few sentences that inform us of the nature of the issue, and not pages of factual description or legal analysis." Commentators have questioned, however, the significance of retaining the policy of restraint given the amount of information that would be required to be disclosed under the proposal.

To reinforce compliance with these proposed disclosure measures, the IRS also indicated in the Announcement that it is considering implementing additional penalties or sanctions for failure to make the required disclosure, including the possibility of seeking legislation from Congress that would impose a penalty for failure to file the Schedule or for inadequate disclosure of an uncertain tax position.

Implementation of the Proposal

As indicated above, a number of the key dimensions of the proposal will require further development and clarification. Perhaps in recognition of this and the vital overall importance of this development to taxpayers, the Announcement requests comments from the public regarding the proposal. The IRS is "particularly interested" in comments on issues related to, among other things: (i) how the maximum tax amount of the U.S. federal income tax exposure should be reflected on the Schedule; (ii) whether there are alternative methods of disclosure of the amount at issue that would allow the IRS to assess the relative importance of tax positions; and (iii) whether the scope of uncertain tax positions that are required to be disclosed should be modified. The deadline for delivering public comments is March 29, 2010.

The IRS stated that it intends to publish the new Schedule on which the proposed disclosures would be made "as quickly as possible" and that it expects to require the new Schedule be filed with tax returns filed after the release of the Schedule. Although not absolutely clear, this would presumably mean that, for calendar year taxpayers, the 2010 taxable year would be the first year for which these disclosures would be required, assuming the proposal is implemented.


In the weeks to come, there will undoubtedly be much debate in the United States about the appropriate scope of this proposal. Importantly, this significant expansion of the disclosure requirements imposed on taxpayers by the IRS exceeds the information gathering practices of the Canada Revenue Agency (CRA) and tax authorities of other countries that are major trading partners with the United States.

In addition, the proposed expansion of tax-related disclosure requirements will generate a significant amount of pressure on the issue of whether attorney-client privilege, work product protection or other evidentiary privileges may be asserted to avoid the disclosure of particular uncertain tax positions that would otherwise be required under the IRS proposal. On this point, the IRS recently achieved an important victory in U.S. v. Textron Inc., 104 AFTR 2d 2009-5719 (1st Cir., 2009), in which the U.S. Court of Appeals for the First Circuit decided that the work product protection did not attach to tax accrual workpapers prepared by Textron's internal tax department in connection with the preparation of the company's tax reserves for its audited financial statements. This decision has driven considerable debate regarding the limits of the work product protection as it relates to tax accrual workpapers. This debate has been fuelled by a strong dissent in the Textron decision and potential differences between judicial circuits in the United States regarding the legal standards for application of the work product protection. In addition, Textron recently made an application for judicial review of the First Circuit's decision to the United States Supreme Court. Given the close relationship between uncertain tax positions for which a reserve must be established for financial accounting purposes and the uncertain tax positions that would be required to be disclosed under the IRS's proposal (i.e., in many cases the information that would be required to be disclosed under the IRS's proposal will be derivative of, or at least substantially similar to, information included in the taxpayer's tax accrual workpapers), the authority of the IRS to compel this information under the Announcement will likely be swept into the debate regarding the interaction of the work product protection and IRS requests for tax accrual workpapers. In the absence of a Supreme Court decision on the issue, this uncertainty will likely persist.

Finally, Canadian taxpayers with U.S. affiliates should consider the potential of this IRS proposal to produce indirect consequences for them. In particular, the recent expansion of the Exchange of Information provisions of the Canada – U.S. Tax Treaty is expected by many to produce an increased flow of tax information between the IRS and the CRA. Information collected by the IRS pursuant to this proposal may in some cases relate to uncertain tax positions associated with transactions or dealings with Canadian affiliates. If the CRA is successfully able to secure this Schedule from the IRS pursuant to the Exchange of Information provisions in Article 27 of the Treaty, this may provide the CRA with an important starting point, if not a roadmap, for identifying potential audit issues on a Canadian taxpayer's return. Also, it is possible that Canada could consider implementing similar measures if this approach becomes successfully implemented by the IRS.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions