IRS Eases Rules on Reporting Uncertain Tax Positions

September 30, 2010

On September 24, 2010, the IRS released the final version of Schedule UTP (Uncertain Tax Position Statement) and related instructions. The IRS also announced several changes that relax its original proposal for requiring certain businesses to report “uncertain tax positions” or UTPs.

By way of background, on January 26, 2010, the IRS announced its intent to require annual reporting of UTPs by certain corporate taxpayers. On April 19, 2010, the IRS released for comment a draft Schedule UTP intended for use by taxpayers to report UTPs. Generally, a corporation would be required to file a Schedule UTP if it has (i) assets of at least $10 million; (ii) audited financials; and (iii) one or more UTPs.

A UTP generally consists of any federal income tax position for which a tax reserve has been established in an audited financial statement. As originally proposed, a UTP also included positions for which no reserve was established because the taxpayer expects to litigate the position or because the taxpayer has determined the IRS has a general administrative practice not to examine the position.

Of primary significance, the initial draft Schedule UTP required a filer to provide both of the following:

  • A concise description of each UTP, including disclosure of the rationale for each UTP and the nature of the uncertainty.
  • Disclosure of the maximum amount of potential federal tax liability attributable to each UTP, determined without regard to the taxpayer’s risk analysis regarding its likelihood of prevailing on the merits (this amount is commonly referred to as the maximum tax adjustment or the “MTA”).

Following the release of the initial draft Schedule UTP, the IRS received numerous comments addressing a wide array of concerns, including the difficulties taxpayers will encounter in complying with the new requirements without jeopardizing attorney-client and other privileges.

The IRS’ formal response to these comments came in the form of its final version of Schedule UTP and Announcement 2010-75 released last Friday. Among numerous changes and clarifications contained in the final requirements, the following are particularly noteworthy:

  • Reporting is now phased in over five years based on a corporation’s size. Corporations having assets of at least $100 million must file Schedule UTP starting with 2010 tax years. The threshold is reduced to $50 million starting with 2012 tax years, and to $10 million starting with 2014 tax years.
  • There is no longer a requirement that the taxpayer disclose the MTA with respect to a UTP. Instead, positions will be ranked according to size of the U.S. federal income tax reserves (but with no requirement to disclose the actual amount of the reserves).
  • There is no longer a requirement that the taxpayer disclose the rationale and nature of uncertainty in the concise description of the position.
  • There is no longer a requirement that the taxpayer disclose a position for which no reserve was recorded because of a general IRS administrative practice not to examine it.

In related Announcement 2010-76, the IRS stated that it is expanding its policy of restraint to forgo seeking legal opinions and other documents relating to UTPs. The scope and practical effect of this restraint remains to be seen.

We continue to evaluate the legal and tax issues arising in connection with the IRS’ implementation of the UTP reporting process. Please do not hesitate to contact any of us or any member of the McGuireWoods LLP Tax Department, if you would like additional information on the UTP reporting process or if we may be of any other assistance.