The Financial Accounting Standards Board (FASB) has issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” to address how companies should account for uncertainties in timing and permanent income tax positions. Many companies seem to have the wrong mindset about the implementation process. They view this process as one big headache. Instead of taking on this frame of mind, we suggest that it gives you the opportunity to remember your role as “financial executive,” rediscovering the tax process and your company’s significant tax positions. This fresh look may give you a clear picture of the company’s tax exposures, with a chance, going forward, to identify and monitor what is revealed.
The IRS has released a draft of Schedule UTP, Uncertain Tax Positions Statement, with accompanying draft instructions, that it proposes to be used by certain taxpayers required to report uncertain tax positions. FIN 48 requires that taxpayers with uncertain tax positions account for and report those positions that affect their income tax liability. The draft Schedule UTP and instructions provide that certain taxpayers will be required to file Schedule UTP beginning with the 2010 tax year. The requirement only applies to taxpayers required to file Forms 1120, 1120 L, 1120 PC and 1120 F, if they have uncertain tax positions and assets equal to or in excess of $10 million and if they or a related party issued audited financial statements. The draft instructions provide that a taxpayer filing a Schedule UTP will be treated as filing a Form 8275 and Form 8275-R due to the fact that those two forms duplicate information reported on Schedule UTP.
The Internal Revenue Service announced it is developing a schedule requiring certain taxpayers to report uncertain tax positions on their tax returns. The Service is now releasing the draft schedule, Schedule UTP, accompanied by draft instructions that provide a further explanation of the Service’s proposal. The Service invites public comment on the draft schedule and instructions. The schedule and instructions will be finalized after the Service has received and considered all of the comments regarding the overall proposal and the draft schedule and instructions.
The draft schedule and instructions provide that, beginning with the 2010 tax year, the following taxpayers with both uncertain tax positions and assets equal to or exceeding $10 million will be required to file Schedule UTP if they or a related party issued audited financial statements:
- Corporations who are required to file a Form 1120, U.S. Corporation Income Tax Return;
- Insurance companies who are required to file a Form 1120 L, U.S. Life Insurance Company Income Tax Return or Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
- Foreign corporations who are required to file Form 1120 F, U.S. Income Tax Return of a Foreign Corporation.
The draft schedule and instructions also provide that, for 2010 tax years, the Service will not require a Schedule UTP from Form 1120 series filers other than those identified above (such as real estate investment trusts or regulated investment companies), pass-through entities, or tax-exempt organizations. The Service will determine the timing of the requirement to file Schedule UTP for these entities after comments have been received and considered.
The Service is reviewing the extent to which the proposed Schedule UTP duplicates other reporting requirements, such as Form 8275, Disclosure Statement; Form 8275-R, Regulation Disclosure Statement; Form 8886, Reportable Transaction Disclosure Statement; and the Schedule M-3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More. The draft instructions provide that a taxpayer will be treated as having filed a Form 8275 or Form 8275-R for tax positions that are properly reported on Schedule UTP. The Service is considering other circumstances under which a tax position reported on Schedule UTP need not be separately reported elsewhere on the tax return or another disclosure statement.
Schedule UTP asks for information about tax positions that affect the United States federal income tax liabilities of certain corporations that issue or are included in an audited financial statement and have assets equal to or exceeding $10 million.
Tax positions to be reported
Schedule UTP requires the reporting of a corporation’s federal income tax positions for which the corporation or a related party has recorded a reserve in an audited financial statement. Schedule UTP also requires the reporting of tax positions taken by the corporation in a tax return for which a reserve has not been recorded by the corporation or a related party based on an expectation to litigate or an IRS administrative practice.
A tax position is required to be reported on a Schedule UTP attached to a particular tax year’s return if:
- at least 60 days before filing the tax return a reserve has been recorded with respect to that tax position, or at least 60 days before filing the tax return a decision was made not to record a reserve based on an expectation to litigate or an IRS administrative practice, and
- the tax position has been taken by the corporation in a tax return for the current tax year or a prior tax year.
A tax position must be reported regardless of whether the audited financial statement is prepared based on United States generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above (for example, modified GAAP) that requires a taxpayer to record a reserve for federal income tax positions.
A tax position is based on the unit of account in the audited financial statements in which the reserve is recorded. A tax position taken in a tax return means a tax position that would result in an adjustment to a line item on that tax return if the position is not sustained. A line item on a tax return may be affected by multiple units of account, in which case each unit of account must be reported separately on Schedule UTP.