Practical considerations for schedule UTP ... an addendum.

• Author: Desmond, Michael J.
• Position: Uncertain tax positions

As expected, in issuing the final version of Schedule UTP on September 24, the Internal Revenue Service rejected calls to drop the schedule altogether; what Commissioner Shulman has characterized as a "game changer," while modified, is now final. (2) The changes made by the IRS are a move in the right direction. They reduce burden (e.g., by eliminating a reporting trigger) and eliminate cumbersome and potentially misleading information, such as the amount of the maximum tax adjustment (MTA).

As notable, or perhaps more so, are the statements by the IRS regarding its "policy of restraint" in seeking tax accrual workpapers. With the final schedule, the IRS adopted an administrative policy of not asserting (at least by personnel in the Examination, or Compliance, part of the agency) that attorney-client privilege or work-product protection has been waived by a taxpayer on account of disclosures to its financial auditor for financial reporting purposes. Although it may be a hollow promise, the announcement is an indication that the IRS is sensitive to broader policy concerns regarding open communication between companies and their auditors.

Who Must File

In the final schedule, the IRS narrowed the scope of who must comply with the Schedule UTP filing requirement. The requirement to prepare and file a Schedule UTP will now be phased in over five years, with Schedule UTP being required by corporations reaching the following asset thresholds:

2010 $100 million 2012 $ 50 million 2014 $ 10 million Although many commentators had recommended that taxpayers in the new Compliance Assurance Process program (CAP) be excluded from the Schedule UTP filing requirement, the IRS did not exclude any broad categories of taxpayers; the IRS did suggest, however, that the application of the Schedule UTP to CAP taxpayers would be addressed in forthcoming guidance making the CAP program permanent. (3) The final schedule was not expanded beyond corporations filing most series 1120 returns, although the IRS said it continues to consider requiring it for pass-through and tax-exempt entities. (4)

What Positions Must Be Reported

In its final form, the IRS narrowed the Schedule UTP reporting requirements in various ways, ranging from eliminating a reporting trigger to narrowing the concise description that is to be provided for each position.

The first, and perhaps most notable of these changes, was to eliminate the reporting trigger for "administrative practice" positions. The rationale for including this in the draft schedule was dubious, given that no reserve is established for such positions on the ground that it is the IRS's established administrative practice to allow (or at least not question) the position. Asking taxpayers to disclose these practices might have enabled the IRS to better understand its own actual or perceived practices, but it would have placed an enormous burden on taxpayers. A better approach might be through improved internal communications and guidance that would make administrative practice more uniform, something the IRS is continuing to work on. (5) Moreover, many items that would have been disclosed under the administrative-practice provision are items that are de minimis (which is often why the IRS administratively allows them in the first instance). The burden of calculating, tracking, and reporting those items would have been significant and in all events would be unlikely to lead to any significant adjustments. To its credit, the IRS recognized that the burden imposed by the administrative practice trigger would have outweighed the benefit of the information provided. Notably, however, the IRS has not given up on the issue, stating that it will continue to explore ways to assess the effect of administrative-practice positions on overall tax compliance.

Schedule UTP continues to require the reporting of positions for which no reserve was established based on an expectation to litigate to a favorable result. In the final schedule, however, the IRS narrowed the positions required to be disclosed in this category. Specifically, the IRS eliminated from the final Schedule UTP the reporting of positions that are "immaterial for audited financial statement purposes" and of positions that are "sufficiently certain so that no reserve was required." (7) To record no reserve because of the expectation to litigate to a favorable result requires that the position meet the more likely than not threshold, which (but for the expectation to litigate) would trigger some reserve requirement. At the other end of the spectrum, and the subject of broader debate, having a position that is sufficiently certain so that no reserve is required might be characterized as a "will" level position. Thus, while it is not entirely clear what remains of the expectation-to-litigate category of reportable positions, what remains is seemingly a requirement to disclose positions below a "will" (or perhaps a "strong should') level and at or above "more likely than not." (8)

Subject to a new transition rule for 2010, the final Schedule UTP retains a requirement for disclosure in Part II of the schedule of uncertain positions taken on prior year returns that have yet to be reported on a Schedule UTP. Part II may, however, be a source of some confusion and concern going forward. The basic requirements for disclosure of prior year positions can be summarized, as follows:

* Uncertain Positions Taken Only on Pre-2010 Returns. If an uncertain position was taken...