Nancy T. Bowen, Brent Gardner and Robert C. Morris
September 28, 2010
The Internal Revenue Service ("IRS") has released its final versions of Schedule UTP, Uncertain Tax Positions Statement and corresponding instructions, which require certain business taxpayers to report their uncertain tax positions to the IRS. The final Schedule UTP and instructions reflect a number of changes from the initial drafts, and address many concerns of the tax community. For a more detailed discussion of the background of Schedule UTP, see IRS Announces New Broad Disclosure Requirements for Uncertain Tax Positions, IRS Releases Draft Schedule and Instructions for Reporting Uncertain Tax Positions, and IRS Moves Closer to Requiring Corporations to Disclose Uncertain Tax Positions.
The IRS also clarified its policy of restraint for seeking tax accrual work papers during an IRS examination, and issued a directive to all IRS Large Business and International Division personnel concerning the use of information obtained from Schedule UTP.
Taxpayers Must Provide Concise Statement of Uncertain Tax Positions Without Explaining the Rationale for the Uncertainty
Affected taxpayers (described below) must report to the IRS on Schedule UTP several items of information relating to their uncertain tax positions, including a "concise description" of each uncertain position. The concise description must describe the relevant facts and include information that can reasonably be expected to apprise the IRS of the uncertain tax position and the issues involved.
In a significant change from draft Schedule UTP, taxpayers are no longer required to provide the IRS with their rationale for each uncertain tax position and the nature of the uncertainty. This is a welcomed change, as many taxpayers and practitioners had expressed concern that providing the IRS with the taxpayer's rationale for the uncertainty may constitute a waiver of the attorney-client privilege, the tax-practitioner privilege, and/or work product protection.
Taxpayers Must Rank Uncertain Tax Positions, Need Not Calculate "Maximum Tax Adjustment"
Another welcomed change is that taxpayers are no longer required to attempt to calculate and report the "maximum tax adjustment" for each uncertain position. Instead, taxpayers must rank each uncertain tax position from highest to lowest based on the amount of tax reserves that the taxpayer has recorded for financial accounting purposes, and must designate as a "Major Tax Position" those positions where the reserves equal or exceed ten percent of all reported positions.
Schedule UTP also requires reporting of positions for which no reserve was recorded for financial accounting purposes because the taxpayer expects to litigate the position. However, taxpayers need not disclose positions for which no reserve was recorded because of IRS administrative practices.
Five-Year Phase-in for Reporting Requirements
For 2010 and 2011 tax years, corporations with assets of $100 million or more that prepare or are included in audited financial statements and that record federal income tax reserves for uncertain tax positions determined under FIN 48 or other accounting standards must file Schedule UTP with their annual income tax returns. This asset reporting threshold is reduced to $50 million for tax years beginning in 2012 and $10 million for tax years beginning in 2014. This phase-in is a departure from the IRS's initial position, which required all corporations with $10 million or more of assets to report their uncertain tax positions beginning in 2010.
IRS Also Revises Policy of Restraint for Seeking Tax Accrual Work Papers
The IRS also clarified its policy of restraint in seeking tax accrual work papers. Although the IRS asserts that it may obtain access to a taxpayer's tax accrual work papers under United States v. Arthur Young & Co, 465 U.S. 805, 815 (1984), its official policy has been to request the production of tax accrual work papers only if the IRS determines that the taxpayer participated in one or more listed transactions, the case is being investigated by the IRS Criminal Investigation Division, or other broadly defined "unusual circumstances" exist.
Although Announcement 2010-76 reaffirms that the IRS will continue to seek tax accrual work papers in the situations described above, the announcement also provides the welcome news that the IRS will not assert that a taxpayer has waived attorney-client privilege, tax-practitioner privilege, or work product protection by providing documents to an independent auditor as part of an audit of the taxpayer's financial statements. The IRS's decision not to assert that work product protection has been waived merely because documents were provided to an independent auditor during the audit of the taxpayer's financial statements is in harmony with the recent decision in United States v. Deloitte LLP, 2010 U.S. App. LEXIS 13226 (D.C. Cir. June 29, 2010). See "Taxpayer Victory in 'Deloitte' Breathes Fresh Air Into Continuing Battle Over Tax Accrual Work Papers," BNA Daily Tax Report, August 3, 2010 for a more detailed discussion of the Deloitte decision.
Taxpayers should keep in mind, however, that while the IRS's policy of restraint applies during an IRS examination, it does not apply in the litigation of a tax dispute. It is not unusual for the IRS to issue broad-ranging requests for discovery, including requests for the taxpayer's tax accrual work papers, during the litigation of a tax dispute.
IRS's Use of Schedule UTP
Members of the tax community have expressed concern that IRS examining agents will automatically propose adjustments for all or at least a large portion of the uncertain tax positions disclosed on Schedule UTP. The IRS Directive counsels IRS personnel to bear in mind that positions disclosed on Schedule UTP "are uncertain for a number of reasons, including ambiguity in the law and a lack of published guidance on issues." Therefore, positions disclosed on Schedule UTP "may or may not require an examination or an audit adjustment by the examiner." In spite of these instructions, however, as always, the "proof will be in the pudding."
This article was prepared by Nancy T. Bowen (email@example.com or 713 651 7705), Brent Gardner (firstname.lastname@example.org or 713 651 5307) and Robert C. Morris (email@example.com or 713 651 8404) from Fulbright's Tax Controversies Practice Group. If you have any questions or need any assistance related to these or any other tax controversy matters, please contact any of the authors listed above or Charles W. Hall (firstname.lastname@example.org or 713 651 5268), Richard L. Hunn (email@example.com or 713 651 5293), Kathryn Keneally, Andrius R. Kontrimas (firstname.lastname@example.org or 713 651 5482), William S. Lee (email@example.com or 713 651 5633), Susan V. Sample (firstname.lastname@example.org or 713 651 5458), Jasper G. "Jack" Taylor III (email@example.com or 713 651 5670) or Brian P. Teaff (firstname.lastname@example.org or 713 651 5192).
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s].
Nancy T. Bowen
Robert C. Morris