By Elizabeth Bearese
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Many hope the Toronto announcements will increase efficiency within the IRS Photographer: Benson Kua |
The commissioner of the Internal Revenue Service in the US has announced the final instructions for tax reporting under Schedule Uncertain Tax Positions (UTPs).
Douglas Shulman unveiled Announcements 2010-75 and 2010-76 on September 24 at the joint conference in Toronto of the American Bar Association's (ABA) taxation and real estate sections. He said they would modify the original Schedule UTP conditions in an effort to achieve full transparency and greater IRS audit efficiency.
The final Schedule UTP is considered a "reaffirmation of the IRS policy of restraint with respect to seeking discovery of potentially privileged tax advice disclosed to auditors," said Claude Stansbury, a partner of Freshfields Bruckhaus Deringer in Washington, DC.
Announcement 2010-75 addresses the original Schedule UTP measure, which requires select business taxpayers to report their uncertain tax positions on their tax returns. It incorporates the IRS's response to public comments on the plan.
Announcement 2010-76 relates to "expanding its policy of restraint in connection with its decision to require certain corporations to file Schedule UTP," a press release said on September 24.
"The draft instructions required Schedule UTP filers to provide the rationale for a position reported on the Schedule along with a description for all uncertain tax positions included on the Schedule UTP," Shulman said at the ABA conference. He added that the final Schedule UTP eliminates this prior requirement. The final Schedule UTP asks that corporate taxpayers only disclose information relevant to identifying the issue.
In late January 2010, Shulman issued Announcement 2010-9, which stated that businesses with more than $10 million in assets would be obliged to report UTPs. To alleviate the burden on small businesses, the IRS decided to implement a five-year phase-in for select corporate taxpayers.
"The majority of large businesses will have to begin reporting for 2010," Stansbury said.
For corporations with total assets of $100 million or more, Schedule UTP must be reported beginning in the 2010 tax year. The total asset threshold will decrease to $50 million starting with tax years starting in 2012 and $10 million in tax years starting in 2014.
The IRS previously required that eligible corporations needed to report a maximum tax adjustment (MTA). MTA calculations were formerly required to be listed for each UTP position.
The final Schedule UTP replaced this requirement and now calls for a ranking of all Schedule UTP positions. This, unlike the former requirement, does include transfer pricing and other valuation positions. The IRS mandates that the ranking relies on the size of the US federal income tax reserve amount, without releasing the amount of the reserves reported on the Schedule UTP.
Stansbury said the IRS will still be getting a lot of detail from taxpayers. "You are still going to have to disclose an awful lot of information or at least highlight the big issues," he said. "This is going to allow the IRS to focus in on the soft spots."
Corporate taxpayers will no longer have to disclose UTPs for which a financial reserve was not recorded "due to an administrative practice of the IRS", Shulman explained. The "IRS may have determined that there is no significant compliance risk in connection with these positions and decided not to require their identification on the UTP," said Edward Froelich, an attorney with Morrison Foerster in Washington, DC .
And the IRS does not intend to require the disclosure of highly certain or immaterial positions.
Stansbury feels the September 24 announcements will help "achieve the efficiency that the IRS is looking for".
Froelich feels the two most problematic aspects of the draft schedule UTP have been removed: the MTA for each UTP and the requirement for a rationale behind the uncertainty of the position. "The IRS responded in an appropriate manner to what many thought was an over-intrusive request for information regarding a taxpayer's risk evaluation of its uncertain tax positions," Froelich said.
While the Schedule UTP instructions have modified, Stansbury said that including a concise description in this voluntary self-assessment has been strongly retained.
"Broadly, the response has been positive, but people want to see how it will be implemented," Stansbury added. Taxpayers and clients alike have generally responded favourably, Froelich confirmed.
