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Deviling details: lots of changes surrounding the reporting of UTP.

in Announcement 2010-9, issued in January 2010, the IRS notified certain corporate taxpayers that it intended to require disclosure in their annual tax return of any federal uncertain tax positions (UTP) in accordance with Accounting Standards Codification Topic 740.10 (formerly FIN 48) that these corporations reported on and disclosed in audited financial statements.

Announcement 2010-30 was then issued in March and accompanied by proposed Schedule UTP and related instructions that requested comments from tax professionals and taxpayers with regard to the proposed disclosure regime.

The comments received were numerous and generally negative. Indeed, many of the comments questioned the authority to require such disclosure, and virtually all the letters extensively criticized the scope and reporting thresholds of the proposals.

Nonetheless, the IRS used its rule-making authority Sept. 8 to make clear that it intends to require certain corporation taxpayers to disclose UTPs on a schedule attached to the taxpayer's return beginning with returns filed for calendar year 2010. The IRS amended the regulations under Sec. 6012, which requires corporations to file income tax returns.


Historically, the IRS has been granted broad authority to prescribe the form and content of returns. The proposed regulation addition authorizes the IRS to require that certain corporations must disclose UTPs in accordance with forms, instructions or other appropriate guidance provided by the IRS.

The UTP disclosures apply to forms 1120, 1120-F (foreign corporations), 1120-L (life insurance companies) and 1120-P (property and casualty insurance companies).

The IRS then released announcements 2010-75 and 2010-76 Sept. 24, which significantly revised initial reporting requirements.

In view of the language of the regulations, the cliche that the devil is in the details is appropriate and both the initial and final 2010 Schedule UTP and the instructions represent those details.

Announcement 2010-75

This announcement addresses the substantive reporting aspects of the disclosure regime. According to the initial proposals, corporate taxpayers with total assets of $10 million or more would be required to comply with the disclosure regime. While that threshold remains, the revisions to the disclosure regime provide that it will be phased in between 2010 and 2014.

For tax years beginning in 2010 and 2011 the threshold for filing UTP will be $100 million; $50 million for 2012 and 2013; and $10 million for 2014.

The new guidance also clarifies that the IRS is only requesting disclosure of federal UTP that are reserved in an entity's audited financial statements under U.S. GAAP, IFRS or other accounting standards because they are determined to be material for financial statement purposes a separate or different meaning for tax disclosure is not required.

ASC 740.10 requires a determination, for purposes of reporting under generally accepted accounting principles of tax liabilities under FAS 109-Accounting for Income Taxes (ASC Topic 740), of whether a claimed tax benefit may be recognized for financial statement purposes and, if so, in what amount.

The financial statement issuer must believe that any tax benefit claimed meets a "more likely than not" confidence threshold in the event it were to be challenged by a tax authority. Even if it meets that threshold, if there is sufficient uncertainty that the position would be sustained in full, the financial statement issuer must estimate the amount of benefit that would be realized upon settlement with the tax authority. Similar rules regarding tax accruals are contained in IAS 12.

The draft Schedule UTP required disclosures of the gross potential tax amount (maximum tax adjustment or MTA) of the UTP for each federal position--that is, before the financial statement "measurement" estimate of settlement.

For transfer pricing and valuation UTP items no dollar amount was required, but multiple items of this type were to be ranked in size of potential adjustment for each category. Under the new proposal (released as a final document by the IRS), this process is to be followed for all other UTPs treated as a single category.

A position, if any, that exceeds 10 percent of the entity's total reported UTP reserve for financial statement purposes (i.e. including state, local and foreign UTPs) is to be identified.

Further, entities were to include in a concise description of each UTP in which they described the rationale for claiming the tax benefit attributable to the UTP Final guidance eliminated this requirement.

The guidance also clarifies that the disclosure regime only applies to subject entities whose financial statements are audited. The disclosure regime does not apply with respect to review or compilation financial statements even when those statements contain income tax reserves.

In addition, as initially proposed, the taxpayer was required to disclose UTPs that were not reflected in the financial statement estimates because the taxpayer believes that the tax treatment, while not in strict compliance with tax law, would not be challenged because IRS administrative practice accepts the taxpayer's treatment. The revisions do not require reporting of these types of positions.

Also, not reported for financial statement tax accrual purposes, but required to be disclosed on Schedule UTP, are financial statement positions the taxpayer intends to litigate, if challenged, and believes would prevail. With regard to the later two types of UTPs, the IRS indicated that it is considering eliminating the extended reporting obligation.

However, the IRS has not yet withdrawn or replaced those proposals. The provision was retained in the revised guidance, but they can be assigned any rank by the reporting entity without consideration to the amount of the position.

Privilege and Similar Work Product Assertions by Entities

Announcement 2010-76 addresses subject taxpayer concerns about the intrusion into privileged communication between the entities and their tax advisers.

This Announcement states that the IRS will retain a policy of restraint with respect to requests for tax accrual work papers (and the continued policy of not requesting "tax exposure analyses" contained in "tax provision reconciliation" work papers). It also states that the IRS will generally respect applicable or appropriate privilege and work product claims consistent with existing law, and will generally assert that those privileges are waived by sharing the information with auditors.

The impact of this portion of the guidance on private entities is likely to be quite different than for public companies in most cases. Public companies criticized the proposals as intrusive, and also asserted that they intensify the ongoing debate over a taxpayer-financial statement issuers' right to seek attorney-client and work-product privileges to protect disclosure of certain communications pertaining to advice with respect to tax positions taken by them.

These privileges particularly work product privilege claims for information shared with an "independent auditor"--are themselves subject to uncertainty and recently have been the subject of significant litigation.

However, the auditor-tax adviser "service model" for public companies most often involves companies that prepare their own tax returns and obtain "filing advice" from tax lawyers. This information is shared with the auditor CPA firm for purposes of evaluating a company's tax provision. Companies contend that the limited purposes of sharing this information does not constitute a "waiver" of privilege with respect to preventing discovery of a company's communications with tax counsel. The recent guidance confirms that the IRS generally agrees with the impacted party's position with regard to this "service model."

But the "service model" for CPA firms and private companies is generally very different from the public company service model. Most private companies do not prepare their tax returns internally and engage the same CPA to perform their audit or review services to prepare their tax returns and to provide their significant tax advice.

Consequently, the outcome of the ongoing controversy with respect to privilege and work product privileged communications with CPAs is inapplicable. Information and communications related to tax return preparation is virtually never subject to privilege claims because it is communicated for the purpose of preparing a tax return a document that is intended to be provided to the government.

While these companies might raise objections when the IRS seeks CPA tax and related work papers, they are not likely to be sustained. And the costs of defending against IRS pursuit of the information would likely be prohibitive.

So, to a large degree, when it comes to asserting privilege claims, private companies and their CPA firms do not really have "a dog in the fight." CPAs, as advisers to their clients, should be aware of and make their clients aware of the limitations on privilege claims.

Kip Dellinger, CPA is senior tax partner at Kallman and Co. LLP in Los Angeles. You can reach him at

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Title Annotation:regulatoryupdate
Author:Dellinger, Kip
Publication:California CPA
Date:Dec 1, 2010
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