Internal Revenue Service meets FIN 48.

• Author: Cheney, Glenn
• Position: Financial reporting

The Internal Revenue Service has proposed a new annual schedule that may require companies to report their "uncertain tax positions," precisely the places that the typical IRS audit targets.

The IRS says Announcement 2010-9 will make audits faster and less painful, but corporate and private company taxpayers worry that compliance may not only add to the burden of preparing taxes but make audits more confrontational.

Speaking in January before the New York State Bar Association taxation section, IRS Commissioner Douglas Shulman said that Announcement 2010-9 is meant to make audits more efficient and cost-effective for the service. In a context where the government needs revenues but wants to cut spending, he sees the service spending a quarter of its audit time looking for issues rather than resolving them in discussions with the company.

"It would add efficiency to the process if we had access to more complete information earlier in the process regarding the nature and materiality of a taxpayer's uncertain tax positions," Shulman said. "The goals of our proposal are simple: to cut down the time it takes to find issues and complete an audit."

In a nutshell, 2010-9 would require a concise description of each uncertain tax position for which the taxpayer has recorded a reserve in its financial statements under the Financial Accounting Standards Board's FIN 48 interpretation.

"Concise," Shulman said, means "a few sentences that inform us of the nature of the issue, and not pages of factual description or legal analysis."

That's a few sentences more than what is required under FIN 48, which does not require discrimination of individual tax positions. A large company may have hundreds of uncertain tax positions. Each would have to be described in words that the company would probably want to have fine-tuned by its legal department.

Far thornier is a requirement that the taxpayer state "the maximum amount 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)."

FIN 48 requires that companies report the aggregate of all the probable amounts that they might have to pay. 2010-9 would require discriminated amounts, not of probable settlements but of maximal settlements.

Those maximal amounts will inevitably end up being the starting point of any negotiations with the IRS, a position much more disadvantageous than the...