IRS Urged to Employ Facts-Based Approach in Uncertain Positions Plan
By Alison Bennett
Publication Date: 08/26/2010
The Internal Revenue Service should employ a facts-based approach when asking taxpayers to disclose their uncertain tax positions under a new form and instructions, among a range of other issues to consider as the agency works to finalize its guidance on the controversial proposal, PricewaterhouseCoopers LLP practitioner Brian Meighan said Aug. 24.
The requirement that taxpayers provide the rationale and reasons why their positions are uncertain needs a close look, Meighan told BNA in an interview. “I think the issue is that historically, IRS has stuck with the facts,” he said. “When you move toward rationale and reasons, that moves toward mental impressions of the taxpayer. I think that providing the facts to make that determination [of whether a potential issue exists for audit] should be sufficient.”
Meighan said some major issues to consider include how the information will be used once taxpayers provide it, how agents will be trained to approach these disclosures, the means by which IRS could offer more transparency on its end, and whether taxpayers should be required to provide a maximum tax adjustment for each of their positions.
Disclosure Plan Described
The disclosure plan, first unveiled in January under Announcement 2010-9, would require taxpayers with $10 million or more in assets to report uncertain tax positions on a new schedule accompanying their returns. IRS released the draft Schedule UTP, Uncertain Tax Position Statement, and instructions for comment in Announcement 2010-30.
Dozens of taxpayers and stakeholders, including PwC, submitted comments for a June deadline.
Meighan noted that IRS may need to address issues that arise in places where the proposal diverges from Financial Accounting Standards Board Interpretation No. 48 (FIN 48), which requires taxpayers to account for uncertain positions on their financial statements in an aggregated, rather than position-by-position, fashion. In those areas, he said, “I think they may need to recognize the cost/benefit.”
Additionally, IRS should “recognize the issues that are raised by the work product question,” Meighan said.
Use of Information Key Issue
Another significant issue, he said, “is how they plan to administer the information that they have received, and ensure that this is properly undertaken. There is a concern that whatever taxpayers provide on the Schedule UTP shouldn't alter what their legal rights and protections were before they filled out the form.”
The PwC practitioner told BNA that the question of how IRS will approach the disclosures is a key issue.
“Government officials have indicated that this will be one of the items that is used as a starting point of an audit,” he said. “The real question is, ‘How does exam use that information?’” Training is very significant, Meighan said.
“It's hard to say what the impact on the audit process will be until you see how they instruct their agents on what the information really means. Just because a taxpayer records a reserve doesn't mean that the position is incorrect or should result in an audit,” he said.
View of Reserves Important, Meighan Says
In fact, Meighan said, when taxpayers record a reserve, under existing accounting standards, “it just means that they believe that there is some risk and there could be an adjustment, and that it's appropriate to put that amount in a reserve.”
He said as IRS puts the disclosure requirements in place, the agency also should work to offer taxpayers certainty sooner rather than later. “In general, it's our view that, as the Service is expecting more transparency, taxpayers also should receive more transparency and answers to difficult questions sooner in the process. There are benefits to both parties,” Meighan said.
The complete text of this article can be found in the BNA Daily Tax Report, August 26, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2010, The Bureau of National Affairs, Inc.
