IRS: What’s in Your Reserve?

Tax law and accounting collide as the IRS prepares to dig deeper into uncertain tax positions.

The Internal Revenue Service is headed down the home stretch with respect to uncertain tax positions. Since June, it has been reviewing public comments on its controversial proposal to require more-detailed disclosures around tax deductions and credits that may not pass muster with the agency. The IRS plans to issue final guidance by the end of the year — in time for affected companies to include the new disclosure form with their 2010 tax returns.

If the bulk of the proposed guidance remains intact, companies with more than $10 million in assets that have identified uncertain tax positions will be required to file a new form, called Schedule UTP, with their annual tax returns. Uncertain tax positions include any position for which a company has created a reserve in an audited financial statement.

Under Schedule UTP, affected companies will have to provide the IRS with an itemized list of uncertain positions, plus the technical arguments supporting the positions, a “concise” description of the tax issues and the relevant tax-code sections involved, and the maximum tax adjustment possible should an entire deduction or credit be disallowed by the IRS.

What’s unusual about the proposal is that it is based on U.S. GAAP instead of tax law, says Scott Wragg, managing director at CBIZ Tofias, a tax and accounting firm. Indeed, financial-statement reserves, which will trigger a Schedule UTP, are governed by an accounting rule known as Topic 740 (formerly FIN 48). But Schedule UTP will require “more work” of companies beyond what is currently needed to comply with Topic 740, adds Wragg. That’s because the accounting rule only requires disclosure of aggregate reserve amounts, not itemized data.

Companies contend that the new schedule will lead IRS auditors directly to tax positions that companies believe are weak, which is something of a flashback to 2006, the year FIN 48 was issued. At the time, public companies were appalled by the prospect of revealing their weakest tax positions in their financial statements, while private companies that used U.S. GAAP were considering accepting qualified auditor opinions just so they could avoid applying FIN 48. The aggregate requirement quelled most of those fears, but Schedule UTP is reviving them.

The practical implications will be that companies that have regular dealings with the IRS will address the issue head-on, while other companies may be pulled into government examinations for the first time, says Mike Dolan, a former acting director at the IRS and currently national director of tax policies and dispute resolution at KPMG. He says companies that are part of the IRS’s continuous examination program, for example, will “try to accelerate resolutions” for 2010. That is, they will work with the IRS to settle older tax disputes, and then adjust 2010 tax positions to reduce uncertainty.

In addition, some of these same companies will try to eliminate uncertainty altogether, thereby doing away with the need to file a Schedule UTP. That can be accomplished by obtaining a prefiling agreement or private-letter ruling from the IRS, two mechanisms the agency uses to rule on issues at the request of the taxpayer. Until now, prefiling agreements, which were introduced in 2000, have been used sparingly. The program, which costs about $50,000 to enter, was most popular in 2005, when 53 requests were made, 29 cases were accepted, and 19 agreements were closed. Last year only 28 requests were made, but participation may increase in light of the new disclosure rules, says Dolan.


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