TEI recommendations for additional guidance on schedule UTP.

• Position: Tax Executives Institute, uncertain tax positions

April 22, 2011

On April 22, 2011, TEI submitted the following recommendations to the Internal Revenue Service for its FAQ webpage relating to Schedule UTP. The comments were prepared under the aegis of TEI's Financial Reporting, Federal Tax, and IRS Administrative Affairs Committees. Contributing substantially to the development of the comments was Donald J. Rath of Synopsys, Inc. TEI Tax Counsel Jeffery P. Rasmussen, staff liaison to TEI's Federal Tax Committee, coordinated the preparation of the Institute's comments.

Tax Executives Institute is pleased to submit the following comments and recommendations for additional guidance about the reporting requirements for uncertain tax positions (UTPs) on Schedule UTP, Uncertain Tax Position Statement. The primary guidance governing the disclosure requirements, which is effective for tax years beginning on or after January 1, 2010, is set forth in the instructions released on September 24, 2010, along with the final schedule. To supplement that guidance, the IRS released Responses to Frequently Asked Questions (FAQs) on a UTP webpage on March 23, 2011. (1)

As the preeminent association of in-house tax professionals worldwide, TEI commends the IRS for issuing additional guidance clarifying the Schedule UTP disclosure requirements. Developing an FAQ webpage--a process also used to clarify the instructions and requirements for Schedule M-3 (Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More)--affords the IRS flexibility to provide rapid and timely guidance about emerging issues and questions relating to Schedule UTP reporting requirements.

Summary of Recommendations

The final Schedule UTP and instructions issued on September 24, 2010, substantially refined the draft Schedule UTP and instructions released April 19, 2010. In addition, the initial FAQ has resolved several important issues about preparation of the schedule, including the meaning of "sufficiently certain," the effect of net operating loss (NOL) and credit carryovers from years prior to the effective date of Schedule UTP reporting, the effect of reducing or eliminating a reserve before the tax return is filed, and whether interest and penalties are taken into account in determining the size of a UTP. Even with the added guidance, issues remain. Accordingly, TEI has developed for the IRS's consideration a series of additional questions and proposed responses that will simplify UTP reporting and minimize duplicative reporting.

TEI's specific recommendations focus on the following areas:

1. General Filing Requirements for Schedule UTP;

2. Reporting of Uncertain Tax Positions the Taxpayer Expects to Litigate;

3. Positions that Increase Tax Attributes;

4. "Disclosure Only" Positions;

5. Interest; and

6. Transfer Pricing Related Positions.

   In addition, the comments note several instances where the instructions to Schedule UTP misapprehend (or depart from) the manner in which reserves are established for financial reporting purposes. To reduce taxpayer burdens and minimize inconsistent reporting, TEI recommends that the reporting of positions on the Schedule UTP follow as closely as possible the recording and reporting of tax reserves for financial reporting purposes. Specifically, TEI recommends that the Schedule UTP instructions and other guidance adopt a standard that an uncertain tax position should be reported when that item is both first reserved and relevant (or could be relevant) to the computation of tax on the return.

   Tax Executives Institute

   Tax Executives Institute is the preeminent association of business tax executives worldwide. Our nearly 7,000 members represent 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.

   Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises, including the application of financial accounting standards to analyze and determine UTPs for which reserves are recorded and reported in their companies' financial statements. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by Schedule UTP and the related instructions.

   Background

   On September 24, 2010, the IRS released, together with Announcement 2010-75, the final version of Schedule UTP and instructions for 2010...