Uncertain tax positions: will the IRS refine reporting guidance?

• Author: Luscombe, Mark
• Position: Tax - Internal Revenue Service

Along with the tax filing season, corporations with $100 million or more in assets face important decisions with regard to uncertain tax positions (UTP). The UTP requirement was new for tax year 2010, and the Internal Revenue Service has been poring over the 1,900 UTP returns filed in 2011. Some indications are that the relatively small number of positions disclosed per corporation may be the result of corporate confusion about the new schedule.

But it is not just large corporations that must start divining IRS instructions. The Schedule UTP filing requirement goes into effect in 2013 for tax year I 2012 for companies with $50 million in assets, and in 2015 for tax year 2014 for companies with assets of $10 million. So smaller companies must pay close attention to any imminent clarifications from the IRS, too.

Speaking at an American Bar Association meeting in Toronto in September 2010, IRS Commissioner Doug Shulman said that UTP disclosures would help to achieve "what most taxpayers and the IRS strive for and basically want--we want certainty regarding a taxpayer's tax obligations sooner rather than later; we want consistent treatment across taxpayers; and we want an efficient use of government and taxpayer resources by focusing on issues and taxpayers that pose the greatest risk of tax noncompliance."

Former IRS Commissioner Larry Gibbs has called introduction of UTP reporting "the biggest change in tax administration in the last 50 years," explaining that "the change embodied in the Schedule UTP initiative is significant because the initiative requires a taxpayer to identify to the IRS certain potential soft spots in the taxpayer's tax return when the taxpayer files the return, whereas prior to the initiative (he taxpayer's obligation was to file an accurate return and then the IRS had to find any potential soft spots in the return."

A corporation must file a UTP form when it records a "reserve" for a tax position in its audited financial statements. Schedule UTP requires the corporation to make a "concise description" of such a tax position. In addition, disclosure on Schedule UTP is also required when a reserve is not recorded in the audited financial statements but in arriving at such a conclusion there was an assumption there is a greater than 50 percent probability the tax position will be litigated.

This latter disclosure is referred to as the "expect to litigate" provision and it has been both misunderstood and controversial., according to J. Richard (Dick) Harvey Jr., distinguished professor of Practice...