FIN 48 and tax return disclosure.

• Author: Bakale, Anthony S.
• Position: Financial Accounting Standards Board Interpretation No. 48

Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, potentially forces disclosure of uncertain tax positions in GAAP-based financial statements. Its implementation has resulted in increased analysis by public auditors, often with the assistance of members of the firm's tax staff and client personnel. However, of equal interest are the IRS's recently announced plans to require disclosure of such uncertain tax positions in corporate tax returns. This item provides a brief overview of the FIN 48 requirements, an update on the IRS plans, and some observations on the dynamics created among an engagement's auditors, tax preparers, and client personnel resulting from these new rules.

FIN 48 Overview

FIN 48 amends and interprets Statement of Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes. It creates the need to identify and measure uncertain tax positions for potential accrual and disclosure in a company's financial statements. The evaluation is a two-step process. First, the company must determine whether it is more likely than not that the position taken or to be taken on a tax return will be sustained under examination (including appeals and potential litigation). This determination must assume that the issue will be examined by a competent authority who has complete knowledge of all information relevant to the position and that the authority's conclusion will be based solely on the technical merits of the position. If a position meets these criteria (and the audit's materiality threshold), the financial statements must be adjusted to reflect the impact, including interest and penalties, and certain disclosures are required. FIN 48 became effective several years ago, but for most nonpublic entities its impact was first felt on financials for calendar year 2009.

Implementation Issues

In practice, these requirements created a very interesting dynamic among the parties involved in the analysis. For years, tax professionals in public accounting firms have been accustomed to practicing in a manner consistent with the Sec. 6694 paid preparer penalty provisions. Those requirements bear similarities to FIN 48. However, Sec. 6694 requires disclosure (Form 8275, Disclosure Statement, or 8275-R, Regulation Disclosure Statement) only in cases where a potential problem is identified. With the implementation of FIN 48, CPA audit teams understandably are seeking...