A different approach for drafting form UTP disclosures.

• Author: Garofalo, William S.

Based on anecdotal evidence (including presentations at educational programs and discussions at networking sessions), the prevailing approach for disclosing "uncertain tax positions" on IRS Form UTP is to provide as little information as possible and not to spend much time in drafting them. This article suggests that a different approach may often be better.

Form UTP is a deceptively simple form. The 2011 form requires corporate taxpayers with assets of more than $100 million (1) to report issues for which tax reserves have been accrued under ASC 740 (formerly FAS 109 or FIN 48). In addition, taxpayers must report tax issues for which there is no reserve, based on the taxpayer's position that it will litigate the potential issue.

The form has been substantially slimmed down from its more intrusive beginnings. On page 1, the taxpayer provides a list of the issues being disclosed. Pages 2 and 3 require a concise description of the issues; page 2 covers disclosures for prior years and page 3 the current year disclosures. The instructions provide that "[i] n most cases, the description should not exceed a few sentences." The instructions also direct that "[t]he concise description should not include an assessment of the hazards of the tax position or an analysis of the support for or against the position." (2)

Very simple. As simple as the iceberg that sank the Titanic. Taxpayers need to exercise care with Form UTP, because a well-drafted disclosure may prevent a great deal of future pain.

The key to drafting form UTP disclosures is to identify the audience and what you want the audience to do. The audience for Form UTP, of course, is (at least in part) the Internal Revenue Service. But who at the IRS? The current IRS practice is to have all returns containing form UTP reviewed by the "Centralized Review Team" before any agent is given access to the return. (3) The use of a centralized team allows the IRS to understand the UTP data and make centralized audit and resource allocation decisions. Interestingly, the IRS currently does not circulate UTP disclosure information to Chief Counsel branches (in the National Office) or Industry Practice Groups (IPGs).

In the first UTP filing season for tax year 2010, more than 400 CIC (4) and 1500 non-CIC taxpayers filed Form UTP. The CIC taxpayers reported an average of 3.1 issues on each form UTP. Non-CIC taxpayers reported an average of 1.9 issues. In total, taxpayers reported 4,186 issues. Transfer pricing accounted for 21 percent of the issues (approximately 880 reports). Research credits and business deductions were the other largest issues in terms of numbers of reports. (5) For tax year 2011, these numbers should increase, since taxpayers will be reporting both 2011 exposures and newly discovered 2010 reserves. For 2013 and 2014, the number of reported issues should go up further, since the threshold...