Reporting uncertain tax positions to the IRS.

• Author: Murray, Erica

On January 26, 2010, the IRS issued Announcement 2010-9, indicating that it intends to require certain corporate taxpayers to disclose information about their uncertain tax positions on their tax returns. The IRS's stated purpose for the disclosure is to improve tax compliance and administration. The disclosure requirements, expected to be effective no earlier than the 2010 tax filing year, include filing a new schedule that the IRS is developing for inclusion with Form 1120, U.S. Corporation Income Tax Return, or other business tax returns. Tax practitioners need to understand the background leading up to the changes and closely follow these potential new regulations and their pervasive effects on clients in order to be prepared for the change and to notify clients.

Disclosure of Uncertain Tax Positions

In the wake of Enron and other financial statement frauds, the information disclosures required under GAAP have increased significantly, including the reporting rules related to uncertain tax positions. In 2006, Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, replaced Statement of Financial Accounting Standards (FAS) No. 5, Accounting for Contingencies, requiring any uncertain tax positions taken by a company on its tax return to meet a more-likely-than-not standard of being upheld in order to be recorded in its financial statements. (Under the FASB codification of accounting standards, the relevant portions of FIN 48 are now mostly contained in Accounting Standards Codification subtopic 740-10, Income Taxes, FASB ASC 740-10.)

In recent years, the IRS has also been pushing for more disclosure and transparency in tax filings. Some prominent examples of this are the creation of Schedule M-3 in 2004, increased informational reporting requirements, enforcement of foreign bank account reporting, and the complete revamping of Form 990, Return of Organization Exempt from Income Tax.

Affected Parties

The IRS intends for the new schedule to be filed by a business taxpayer with assets in excess of $10 million if the taxpayer has one or more uncertain tax positions of the type required to be reported on the new schedule. This includes taxpayers who prepare financial statements, or are included in the financial statements of related entities that prepare financial statements, if the taxpayers or related entities determine their U.S. federal income tax reserves under FIN 48 or other...