Requirements for Reporting Uncertain Tax Positions

Tax Professionals Resource
September 18, 2012 — 1,142 views  
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In 2010, the Internal Revenue Service (IRS) increased the requirements for reporting Uncertain Tax Positions (UTP). After a thorough comment period, the IRS had finalized its requirements with a gradual phase-in based on total corporate assets. The company's UTPs must be ranked by size with a concise description of the material facts.

Definition of UTP

The UTP represents an established reserve created by a taxpayer in an audited financial statement or an expectation for litigation concerning a potential tax liability. During the comment period, the litigation issue required the IRS to relax its demands. The IRS recognized the need to protect information, which might be part of litigation. Furthermore, companies could not adequately calculate potential liabilities when a third-party authority could modify the parameters of the position.

Attorney-Client Privilege

For many corporations, the UTP reserve is established due to questions over an affiliate status or future litigation. Accountants, advisers, attorneys and independent auditors noted that attorney-client privilege would prevent them from making more complete disclosure of the specifics of their UTP. There was concern over whether the UTP would be used by the IRS to determine which companies to audit.

Description, Ranking and Listing

The IRS has reduced requirement for reporting uncertain tax positions to ranking, listing and description. This basic level should not violate attorney-client privilege. No in-depth analysis is necessary. The IRS Form 1120 Schedule UTP requires the following:

List of UTP for current year, UTP number, timing codes [permanent or temporary],
pass-through Entity EIN, major tax position and ranking of said tax position. The UTP ranking is based on the size of the financial account in reserve using an annual basis.

Corporations must make their concise description of the UTP on the last page of the schedule. This is a brief statement with relevant facts explaining "What" and "Why."

Positions taken on pre-2010 year tax returns need not be disclosed. Reserve amounts include estimated income taxes, interest and penalties. Transfer pricing positions must be specifically identified.

Who Must File UTP Schedule?

The IRS agreed to a five-year phase-in for the UTP in order to assist in its implementation. In 2010, any corporation with total world assets over $100 million with uncertain tax positions must file this schedule. In 2012, the, corporations with assets over $50 million must file. In 2014, this total asset threshold is reduced to $10 million.

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