Additional tax changes may be on the horizon for U.S. businesses. However, at this point, it is too soon to tell whether they will ease or expand compliance burdens. The Internal Revenue Service (IRS) is currently evaluating whether to eliminate or modify Schedule UTP, the Uncertain Tax Position Statement, following a report by the Treasury Inspector General for Tax Administration that raised concerns about its effectiveness.
Disclosing Uncertain Tax Positions
The Sarbanes-Oxley Act of 2002 and accounting standards, known as Financial Accounting Standards Board Interpretation No. 48, require companies with a Securities and Exchange Commission filing requirement to reserve for, and report, tax uncertainties. The IRS subsequently seized on the opportunity to use this newly available information to boost its own tax examination and compliance efforts.
Starting in Tax Year 2010, the IRS created Schedule UTP, Uncertain Tax Position Statement, for Form 1120. Schedule UTP asks for information about tax positions that affect the U.S. federal income tax liabilities of certain corporations that issue or are included in audited financial statements and have assets that equal or exceed $10 million. It was established to achieve certainty regarding a taxpayer’s tax obligations, consistent treatment across taxpayers, and an efficient use of Government and taxpayer resources by focusing on issues and taxpayers that pose the greatest risk of noncompliance.
As highlighted by the Treasury Inspector General for Tax Administration (TIGTA), Schedule UTP was originally proposed included information that would have contained the details necessary to gauge materiality and establish a scope of the disclosed issues. This includes items such as the amount of the reserve, the maximum tax adjustment for each position listed, a description of the rationale and nature of the uncertain position, and the reporting of tax positions for which no reserves were recorded due to accepted administrative practices. Changes made as a result of public comment reduced the information being requested to include the relevant Internal Revenue Code section; taxable year in which the position relates; an indication of whether a disclosed issue is permanent, temporary, or related to a pass-through entity; the specific taxpayer’s ranking of the disclosed issue; and “a few sentences” describing the taxpayer’s uncertain tax position.
Treasury Inspector General of Tax Administration’s Report
TIGTA launched the audit to determine whether the IRS has incorporated Schedule UTP into the examination process and is using Schedule UTP information to improve return selection and examination results. Its report concluded that Schedule UTP does not contain sufficient information to aid IRS compliance efforts.
“The lack of detail and specifics related to the concise description of the reported tax position provide little more than a confirmation that certain issues exist,” the report stated. “The weaknesses in the form provide for limited use by examiners and group managers in the field and by Large Business and International Division management and executives to strategically use the form during inventory identification and delivery. Without changes that would expand the details reported on the form, such as requiring more detailed descriptions of the reported tax position or dollar amounts of disclosed positions, the expectations and goals in implementing Schedule UTP will not be realized.”
IRS Response to Calls to Reform Schedule UTP
TIGTA recommended that the Commissioner, Large Business and International Division, in coordination with the Department of the Treasury’s Office of Tax Policy, consider the feasibility of either modifying Schedule UTP to include information needed to be useful for its intended purpose or removing the Schedule UTP filing requirement.
In response, the IRS plans to examine whether it makes sense to amend Schedule UTP to require more useful information. However, the agency balked at the idea of eliminating the Schedule UTP filing requirement entirely. Below is a portion of the response written by Douglas O’Donnell, commissioner of the IRS’s Large Business and International Division:
The IRS believes the due diligence filing requirements of Schedule UTP promote voluntary compliance with the LB&I filing population. The requirement to identify uncertain tax positions is consistent with financial statement reporting and provides taxpayers a mechanism to evaluate filing positions and compliance risk. As with Securities and Exchange Commission filing requirements for Financial Accounting Standards Board 48 (i.e., FIN 48), the knowledge that a reporting entity will be required to specifically report transactions with an analysis determining whether the position is ‘more likely than not’ to be sustained by the taxing authority provides both the IRS and taxpayers with a tool to improve voluntary compliance.
The IRS must now examine whether changes should be made to Schedule UTP or if it should be abandoned completely. In light of the Treasury Inspector General for Tax Administration’s report, we are hopeful that the agency will weigh the usefulness of the information obtained against the additional compliance cost on taxpayers. Please check back for updates andwith any questions.
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If you have any questions or if you would like to discuss the matter further, please contact me, Frank Brunetti, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.