Previously published in Gardere Wynne Sewell LLP's Client Tax Alert
IRS will require disclosure of uncertain positions on tax
returns of businesses with more than $10 million in assets.
On January 26, the IRS issued Announcement 2010-9, announcing that
the IRS intends to develop a new schedule to be attached to the
returns of businesses having more than $10 million in assets, on
which they will be required to report their "uncertain tax
positions." This requirement can be expected to change
significantly the depth and breadth of IRS examinations.
The IRS uses as a springboard for this new requirement the fact
that many taxpayers are required, for financial accounting purposes
under FIN 48, to identify and quantify tax positions for which they
have reserved. The Announcement states the obvious: "[T]he
information developed in the course of complying with FIN 48 . . .
would aid the Service in focusing its examination . . . as well as
allowing examination teams to identify all of the issues underlying
the tax returns more quickly and efficiently."
In general, it is expected that the schedule would call for:
- a concise description of each tax position for which a reserve has been recorded;
- the maximum amount of potential tax liability attributable to each position; and
- a statement of the legal rationale for the position.
The new disclosure requirement, once finalized, would elicit
more information from more taxpayers about their uncertain
positions than the IRS can glean currently through the FIN 48
requirements. It will call for a breakout of the specific
dollar-amount at issue for each position, whereas FIN 48
disclosures frequently aggregate amounts. Also, the FIN 48
disclosure requirements do not call for a discussion of the legal
rationale for a position.
Most importantly, the IRS will have a computer-searchable database
of the uncertain tax positions of all taxpayers with more than $10
million in assets, rather than merely the SEC filings of public
companies making FIN 48 disclosures. This will enable the IRS to
identify quickly those taxpayers having uncertain positions that
might not otherwise have attracted an audit. Thus, the IRS
won't just have the "roadmap" that FIN 48 was accused
of providing - it will have "GPS."
Although the proposed schedule would require disclosure of the
amount of tax that the taxpayer would owe if the uncertain
position were disallowed, the IRS Commissioner stated specifically
that the schedule "would not require that taxpayers disclose
how strong or weak they regard their tax positions or the amount
they reserved on the books regarding those positions." Thus,
it is not expected that the schedule would require disclosure of
tax accrual workpapers that contain an analysis of the
risk of disallowance of taxpayers' uncertain
tax positions. The Announcement closes with a call for comments on
the proposed disclosure schedule and a flood of comments are
expected.
Gardere has well-recognized expertise in FIN 48 and accounting for
uncertain tax positions. Its attorneys have authored a
widely-circulated treatise on the topic.
For questions about the content of this alert, please contact
Gardere
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.