Announcements 2010-9: disclosure of uncertain tax positions and the IRS policy of restraint.

May 28, 2010

On May 28, 2010, Tax Executives Institute filed the following comments with the Internal Revenue Service on Announcement 2010-9, relating to the disclosure of uncertain tax positions, proposed Schedule UTP, and the schedule's draft instructions. TEI's comments were developed under the joint aegis of the Institute's Federal Tax, Financial Reporting, IRS Administrative Affairs, and International Tax Committees. Eli J. Dicker and Jeffery P. Rasmussen of TEI's legal staff coordinated the preparation of the Institute's comments.

On January 26, 2010, the Internal Revenue Service released Announcement 2010-9, stating the IRS's intention to require certain business taxpayers to disclose on a new tax return schedule the uncertain tax positions (UTPs) for which reserves are recorded under financial accounting standards. The Announcement invites public comment about the contents of the schedule, instructions, and the IRS's proposed approach and was published in the February 16, 2010, issue of the Internal Revenue Bulletin (2010-7 I.R.B. 408). The Announcement was subsequently modified by Announcement 2010-17, which was published in the March 29, 2010, issue of the Internal Revenue Bulletin (2010-13 I.R.B. 515). Proposed Schedule UTP (Uncertain Tax Position Statement) and draft instructions were released with Announcement 2010-30 on April 19, 2010, and published in the May 10, 2010, issue of the Internal Revenue Bulletin (2010-19 I.R.B. 668).

Tax Executives Institute

Tax Executives Institute is the preeminent association of business tax executives worldwide. Our approximately 7,000 members represent 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises, including the application of financial accounting standards to analyze and determine the UTPs for which reserves are recorded and reported in their companies' financial statements. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by the Announcements, proposed schedule, and draft instructions.

Announcement Background

Announcement 2010-9 states that the IRS intends to require a "business taxpayer" with assets in excess of $10 million to disclose its UTPs if it prepares financial statements (or is included in the financial statements of a related entity) and the taxpayer (or related entity) "determines its 'United States federal income tax reserves' under FIN 48, or other accounting standards relating to uncertain income tax positions involving United States federal income tax." (1) The proposed schedule and instructions released with Announcement 2010-30 confirm that, beginning with the 2010 tax year, the schedule is required for corporations that issue or are included in financial statements and have $10 million or more in assets and file Form 1120 (U.S. Corporation Income Tax Retrain) or another corporate income tax return (such as Forms 1120L, 1120PC, or 1120F). The schedule will not be required in 2010 for other corporations (such as real estate investment trusts or regulated investment companies), pass-through entities, or tax-exempt organizations.

UTPs must be disclosed for which (i) the taxpayer or a related entity has recorded a reserve in its financial statements, (ii) no reserve has been recorded because the taxpayer expects to litigate the position and the taxpayer determines that if the IRS had full knowledge of the tax position it is unlikely a settlement would be reached, or (iii) no reserve has been recorded because the taxpayer has determined that the IRS has a general administrative practice not to examine the position. The schedule requires taxpayers to give a concise description of each UTP and to disclose "'the maximum 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)." (2) For the disclosure to be sufficient, the concise description of each UTP must provide enough detail so that the IRS can determine the nature of the issue, which will "depend on the taxpayer's particular facts and the nature of the underlying transaction." (3) The description must include the rationale for the position and "the reasons for determining that the position is an uncertain tax position." (4) In addition, as expanded by the draft schedule and instructions for Schedule UTP, the description must contain:

1. Up to three Internal Revenue Code sections potentially implicated by the position;

2. A description of the taxable year or years to which the position relates;

3. A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;

4. A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;

5. A statement whether the position involves a determination of the value of any property or right; and

6. A statement whether the position involves a computation of basis.

   Draft Schedule UTP does not require disclosure of taxpayers' tax accrual workpapers, nor does it require disclosure of specific reserve amounts? For purposes of the schedule, a tax position taken in a tax return means a tax position that would result in an adjustment to a line item on the tax return (or would be included in a section 481(a) adjustment) if the position is not sustained. (6)

   General Comments on Taxpayer Burdens and the IRS Policy of Restraint

   In a January 26, 2010, speech accompanying the release of Announcement 2010-9, Commissioner Douglas H. Shulman said that transparency will aid the IRS in achieving its compliance and enforcement objectives of certainty, consistency, and efficiency. Examiners, the Commissioner explained, spend up to 25 percent of their time "searching for issues"--time, he said, that can be better spent examining, discussing, and resolving issues with taxpayers. Efficiency will be enhanced, he explained, by helping the IRS "prioritize selection of issues and taxpayers for examination" thereby reducing the time and resources devoted to examinations. In addition, taxpayers that are transparent with the IRS will achieve certainty of treatment of their transactions more quickly than under traditional examination techniques. Finally, the disclosures will enhance the IRS's ability to achieve consistent treatment of taxpayers. According to Commissioner Shulman, the proposed schedule will not "be adding substantial new work or burden on taxpayers" because they "are already required to establish tax reserves for uncertain tax positions in determining their financial statement income under United States or foreign accounting standards, such as FIN 48."

   Since the Commissioner's January 26 speech and the issuance of Announcement 2010-9, the IRS has engaged in an extraordinary outreach to taxpayers and the tax-practitioner community about the agency's transparency initiative. For instance, senior IRS officials have participated in numerous conferences, webinars, and other meetings, responded to questions and concerns about the agency's transparency initiative, and clarified numerous issues about the purpose, scope, and specific requirements of Schedule UTP. While TEI has significant reservations about Schedule UTP, we do commend the process that the IRS has employed in seeking feedback, responding to taxpayer concerns, and evincing a willingness to consider alternative approaches.

   As a general matter, TEI agrees that transparency is beneficial for the tax system. Thus, many of the recent initiatives undertaken by Congress, the IRS, and the SEC to promote greater transparency and corporate accountability have had salutary effects upon both tax administration and the financial reporting system. TEI has long supported enhanced disclosure regimes--such as that for reportable transactions--to aid the IRS in its identification and analysis of potentially abusive transactions. In addition, efficiency, certainty, and consistency are inarguable goals for tax administration. Despite agreement on these goals, TEI has reservations about proposed Schedule UTP's efficacy in achieving the desired efficiency, consistency, and certainty. Significantly, we believe the burden of preparing the schedule has been underestimated by the IRS, while its supposed utility to the agency may be exaggerated. Hence, the Institute questions whether the presumed benefits of the schedule will be realized.

   Moreover, assuming the IRS has legal authority to require the schedule, we question whether as a matter of sound tax policy and administration that authority should be exercised. First, we believe that the policy considerations that gave rise to the IRS's adopting the policy of restraint in 1981 (in terms of both encouraging candid communication between taxpayers and their auditors and of not disrupting the IRS-taxpayer relationship) continue to have validity. More to the point, given the adversarial nature of tax examinations, we do not believe the schedule should be implemented absent sufficient procedural safeguards to (1) ensure that taxpayer disclosures are properly interpreted and not used as a substitute for a full and independent examination of the facts...