IRS introduces final schedule UTP with modifications.

• Author: Dell, Michael
• Position: Uncertain tax position

In his keynote address before the American Bar Association in Toronto on September 24, IRS Commissioner Douglas Shulman announced the much-anticipated release of the final schedule (Schedule UTP) and instructions for disclosing uncertain tax positions, as initially outlined in Announcement 2010-9. Final Schedule UTP differs from the draft schedule in several respects, including:

* For 2010, only corporations with $ 100 million or more of assets must file Schedule UTP. For corporations with assets below $ 100 million and greater than or equal to $10 million, the requirement to file Schedule UTP will be phased in over five years.

* Final Schedule UTP drops the draft schedule's requirement to include a maximum tax adjustment with each tax position disclosed. Instead, the final schedule requires filers to rank their tax positions on an annual basis by the amount of the U.S. federal income tax reserve recorded for each tax position.

* The concise description requirement no longer requires filers to include a rationale and reasons for the uncertainty. Instead, the description must give the IRS sufficient information to reasonably identify the tax position and the nature of the issue.

* Final Schedule UTP eliminates the draft schedule's requirement to disclose tax positions for which filers did not record a reserve based on an IRS administrative practice of not examining the position.

With the final schedule and instructions, the IRS issued an internal directive for all Large Business and International (LB&I) Division personnel outlining the planned treatment of Schedule UTP information. It also issued Announcement 2010-76, which outlines modifications to the IRS's policy of restraint, with the guidance package.

Who Must File Schedule UTP

For 2010, corporations with total assets of $100 million or more must file Schedule UTP if:

* They file Form 1120, U.S. Corporation Income Tax Return; Form 1120-L, U.S. Life Insurance Company Income Tax Return; Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; or Form 1120-F, U.S. Income Tax Return of a Foreign Corporation;

* They or a related party issued audited financial statements reporting all or a portion of their operations for all or a portion of their tax year; and

* They have tax positions subject to disclosure on Schedule UTP.

Form 1120 filers meet the $100 million threshold if the amount reported on page 1, item D, of Form 1120 is $100 million or more. Form 1 120-L and 1120-PC filers satisfy the threshold if the higher of their beginning or end-of-year total assets on accompanying Schedule L is $100 million or more. Form 1120-F filers must use worldwide assets to determine whether they meet the threshold, even when filing a protective Form 1120-F.

For corporations with less than $100 million in assets, a five-year phase-in of the Schedule UTP applies. Under the phase-in rule, the total asset threshold will drop to $50 million or more in 2012 and $10 million or more in 2014.

The IRS notes that Compliance Assurance Program (CAP) filers are subject to Schedule UTP filing requirements. In Announcement 2010-75, however, it also announced that it will expand the CAP and make it permanent. It expects to issue details on the program changes shortly, as well as guidance on how CAP filets should comply with Schedule UTP's disclosure requirements.

As for passthrough entities and tax-exempt organizations, the IRS will consider whether they should be subject to the filing requirement in 2011 or later.

What Must Be Disclosed

The final instructions require filers to disclose each federal income tax position taken on their income tax return if (1) the position is taken on a tax return for the current or prior tax year and (2) either the corporation or a related party recorded a reserve for U.S. federal income tax in an audited financial statement for the position or did not record a reserve for the tax position based on an expectation of litigation.

To be consistent with the determinations made by the corporation or a related party under applicable accounting standards, the final instructions do not require filers to disclose tax positions for which no...