The Internal Revenue Service (IRS) in the US has released proposed regulations which require select corporate taxpayers to attach a Schedule Uncertain Tax Position (UTP) statement to their income tax returns. The regulation, 1.6012-2(a)(4)-(5), applies to income tax returns for tax years beginning after December 15 2009 and ending after the yet to be established date when the final regulations are published.
"These regulations are not the first word, they are another chapter in the process," said Elliot Pisem, a tax partner at Roberts & Holland, a law firm. "Now [the IRS] is firming up its authority to ask for this information."
In late January 2010, IRS Commissioner Douglas Shulman issued Announcement 2010-9, which states that taxpayers with more than $10 million in assets will be obliged to report UTPs. Typically, the IRS requires eligible taxpayers to list UTPs in accordance with Financial Interpretation Number 48 (FIN 48) or Generally Accepted Accounting Principles (GAAP) accounting guidelines.
Moreover, the corporate taxpayer must also include on the schedule any situations in which they did not record a reserve because they anticipate litigating the issue, or there is an existing administrative practice not to audit these positions.
Regulation 1.6012-2(a)(4)-(5) now mandates that all of these stipulations be included in the schedule and that the schedule be attached to the taxpayer's income tax returns.
The IRS justified their objective for the new proposed Schedule UTP in the preamble to the regulations:
"This information will aid the IRS in indentifying those returns that pose the most significant risks of noncompliance and in selecting issues for examination. The IRS intends to implement the authority provided in this regulation initially by issuing a schedule and explanatory publication that require those corporations that prepare audited financial statements to file a schedule indentifying and describing the uncertain tax positions, as described in FIN 48 and other generally accepted accounting standards, that relate to the tax liability reported on the return."
Reaction to the regulations has ranged from unwavering opposition and utter confusion to praise and everything in between.
One attorney said the tax profession's objective was to comply with the law.
Edward Froelich of Morrison & Foerster explained the "tremendous amount of feedback" from "all sorts of quarters" shares a common goal: to carry out the regulations and Schedule UTP effectively.
Froelich argues that taxpayer's are concerned less with the IRS' authority and instead think that "the content of what is required by the form is objectionable". Many of the negative comments stem from the idea that it does not seem appropriate for the tax authorities to require a company to tell the IRS where a company's questionable areas are in such detail.
Froelich says that one qualm with the proposed UTP regulations is that "they are an intrusion into a company's internal legal analyses. When a company derives its FIN 48 positions it has to go through and prove if they are 50% likely or not to prevail with an uncertain position." This redirects "a lot of the burden on the internal accounting function and legal functioning of the companies," said Froelich.
States are evaluating Schedule UTP and may consider adopting their own versions of it. Many states are already able to receive information through information sharing agreements with the IRS. A memorandum of understanding, or Abuse of Tax Avoidance Taxation (ATAT MOU), is one way in which information could be shared. To date, 48 states have adopted ATAT MOUs. Furthermore, a number of states have requested general agreements of cooperation, whereby they exchange information with the IRS. In states such as California, this is an automatic exchange that often occurs on a regular basis.
Revenue authorities around the world are also starting to share information.
Froelich explained that there is "increasing cooperation between the IRS and foreign tax authorities with treaties such as Tax Information Exchange Agreements (TIEAs) and joint audit programmes".
The IRS will be holding a routine public hearing in Washington, DC on October 15 and asks that all comments are received by October 12.
