Uncertain Tax Positions Proposal Seen Changing Disclosure Landscape
By Alison Bennett
Publication date: 02/03/2010
The Internal Revenue Service's proposal to require taxpayers to report all their uncertain tax positions and associated dollar amounts on a new tax schedule will change the landscape of disclosure and provide tax authorities with sharply increased information as they select returns and issues for audit, practitioners told BNA in a series of interviews in late January.
As the agency continues its focus on transparency in large corporate taxpayers and the U.S. Supreme Court considers whether it will grant certiorari in Textron, a major case on the accessibility of tax accrual work papers, stakeholders said the proposal potentially will shift the relationship between big corporations and IRS.
“The breadth of the disclosure on this is something we have to carefully evaluate,” Charles Egerton, chair-elect of the American Bar Association Section of Taxation, told BNA Jan. 29. “We have a lot of clients who are upset about this. The question is whether this is a reasonable expansion of the service's requests for transparency. We have to decide where we think the line should be drawn.”
New Schedule Would Be Mandatory
Commissioner of Internal Revenue Douglas Shulman unveiled the proposal, described in Announcement 2010-9, Jan. 26. The new schedule would be mandatory for taxpayers with assets of over $10 million who have a financial statement prepared under Financial Accounting Standards Board Interpretation No. 48 (FIN 48), or other similar accounting standards, reflecting uncertain tax positions.
Calling the proposal “a major step toward transparency,” Shulman stressed IRS is seeking only a brief description of the issue and the maximum U.S. tax exposure associated with each uncertain position. He said IRS's goal is to reduce the time spent selecting taxpayers and identifying issues for audit—time that now occupies up to 25 percent of each examination.
The IRS commissioner also emphasized that IRS is not asking taxpayers to disclose their thought processes, how strong or weak they believe their positions are, or the amounts they reserved on their books for those positions. Shulman said the agency is not otherwise changing its policy of restraint with respect to tax accrual work papers.
Policy of Restraint Major Issue
Egerton said in his view, however, the proposal represents “a marked change from the old voluntary restraint policy that the service employed,” because of the detailed nature of the information taxpayers would be required to disclose. “This is a major deviation from what we used to have,” he said, noting that “there's not much left to exercise restraint on. An awful lot of taxpayers will be affected.”
Egerton said, “a lot may depend on what happens with the Supreme Court.” The court currently is deciding whether to accept Textron, Inc.'s appeal of the First Circuit's 3-2 ruling that the IRS could get tax accrual work papers as part of its investigation into the company's alleged use of an abusive tax shelter (Textron Inc. v. United States, U.S., No. 09A361, petition filed 12/24/09) .
Sweeping Change Seen
In issuing the proposal on uncertain tax positions, Shulman said the government is seeking not to overburden taxpayers, but practitioners said the change goes deeper than the burden of preparing another schedule to accompany a return.
Although taxpayers currently must report figures on their financial statements attributable to uncertain tax positions, stakeholders said, this is usually done in the aggregate. This is the first time they would be required to specifically disclose those positions one by one to IRS, with a tax dollar amount attached, practitioners said.
“This brings a whole new responsibility on the part of taxpayers to aid the IRS in its audit function, and that's a big sea change,” Tom Ochsenschlager, vice president of tax for the American Institute of Certified Public Accountants, told BNA Jan. 29. “IRS is essentially asking taxpayers to prioritize issues on their behalf.”
Ochsenschlager said that not only would this level of disclosure be unprecedented, but that in his view, the agency is setting a new standard for that disclosure. Under FIN 48, if a taxpayer does not believe a position has a “more likely than not” chance of success, it is considered uncertain.
Information Sought by IRS
In Announcement 2010-9 itself, IRS said that to be sufficient, the description of each position must contain:
- the tax code sections potentially implicated by the position;
- a description of the taxable year or years to which the position relates;
- a statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
- a statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
- a statement on whether the position involves a determination of the value of any property or right; and
- a statement on whether the position involves a computation of basis.
In addition, taxpayers would have to specify, for each uncertain tax position, the entire amount of U.S. federal income tax that would be due if the position were disallowed in its entirety on audit. This would be the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction, or credit if the position is not sustained.
Coalition Forming
The issue promises to be one of continuing focus for tax groups, practitioners, and other stakeholders.
Lawrence Hill, Dewey & LeBoeuf LLP, New York, told BNA Jan. 28 that a coalition is being formed to comment on the uncertain tax positions development.
“The purpose of the coalition is to seek clarification and practical application of the rules,” he said. This proposal represents a sea change in the area of voluntary compliance. Companies are receptive to these changes. However, they want to ensure that the rules are transparent and pragmatic.”
He noted that the group is still forming, and expects to submit its comments in March.
The complete text of this article can be found in the BNA Daily Tax Report, February 3, 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.
Uncertain Tax Positions Proposal Seen Changing Disclosure Landscape
By Alison Bennett
Publication date: 02/03/2010
The Internal Revenue Service's proposal to require taxpayers to report all their uncertain tax positions and associated dollar amounts on a new tax schedule will change the landscape of disclosure and provide tax authorities with sharply increased information as they select returns and issues for audit, practitioners told BNA in a series of interviews in late January.
As the agency continues its focus on transparency in large corporate taxpayers and the U.S. Supreme Court considers whether it will grant certiorari in Textron, a major case on the accessibility of tax accrual work papers, stakeholders said the proposal potentially will shift the relationship between big corporations and IRS.
“The breadth of the disclosure on this is something we have to carefully evaluate,” Charles Egerton, chair-elect of the American Bar Association Section of Taxation, told BNA Jan. 29. “We have a lot of clients who are upset about this. The question is whether this is a reasonable expansion of the service's requests for transparency. We have to decide where we think the line should be drawn.”
New Schedule Would Be Mandatory
Commissioner of Internal Revenue Douglas Shulman unveiled the proposal, described in Announcement 2010-9, Jan. 26. The new schedule would be mandatory for taxpayers with assets of over $10 million who have a financial statement prepared under Financial Accounting Standards Board Interpretation No. 48 (FIN 48), or other similar accounting standards, reflecting uncertain tax positions.
Calling the proposal “a major step toward transparency,” Shulman stressed IRS is seeking only a brief description of the issue and the maximum U.S. tax exposure associated with each uncertain position. He said IRS's goal is to reduce the time spent selecting taxpayers and identifying issues for audit—time that now occupies up to 25 percent of each examination.
The IRS commissioner also emphasized that IRS is not asking taxpayers to disclose their thought processes, how strong or weak they believe their positions are, or the amounts they reserved on their books for those positions. Shulman said the agency is not otherwise changing its policy of restraint with respect to tax accrual work papers.
Policy of Restraint Major Issue
Egerton said in his view, however, the proposal represents “a marked change from the old voluntary restraint policy that the service employed,” because of the detailed nature of the information taxpayers would be required to disclose. “This is a major deviation from what we used to have,” he said, noting that “there's not much left to exercise restraint on. An awful lot of taxpayers will be affected.”
Egerton said, “a lot may depend on what happens with the Supreme Court.” The court currently is deciding whether to accept Textron, Inc.'s appeal of the First Circuit's 3-2 ruling that the IRS could get tax accrual work papers as part of its investigation into the company's alleged use of an abusive tax shelter (Textron Inc. v. United States, U.S., No. 09A361, petition filed 12/24/09) .
Sweeping Change Seen
In issuing the proposal on uncertain tax positions, Shulman said the government is seeking not to overburden taxpayers, but practitioners said the change goes deeper than the burden of preparing another schedule to accompany a return.
Although taxpayers currently must report figures on their financial statements attributable to uncertain tax positions, stakeholders said, this is usually done in the aggregate. This is the first time they would be required to specifically disclose those positions one by one to IRS, with a tax dollar amount attached, practitioners said.
“This brings a whole new responsibility on the part of taxpayers to aid the IRS in its audit function, and that's a big sea change,” Tom Ochsenschlager, vice president of tax for the American Institute of Certified Public Accountants, told BNA Jan. 29. “IRS is essentially asking taxpayers to prioritize issues on their behalf.”
Ochsenschlager said that not only would this level of disclosure be unprecedented, but that in his view, the agency is setting a new standard for that disclosure. Under FIN 48, if a taxpayer does not believe a position has a “more likely than not” chance of success, it is considered uncertain.
Information Sought by IRS
In Announcement 2010-9 itself, IRS said that to be sufficient, the description of each position must contain:
- the tax code sections potentially implicated by the position;
- a description of the taxable year or years to which the position relates;
- a statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
- a statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
- a statement on whether the position involves a determination of the value of any property or right; and
- a statement on whether the position involves a computation of basis.
In addition, taxpayers would have to specify, for each uncertain tax position, the entire amount of U.S. federal income tax that would be due if the position were disallowed in its entirety on audit. This would be the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction, or credit if the position is not sustained.
Coalition Forming
The issue promises to be one of continuing focus for tax groups, practitioners, and other stakeholders.
Lawrence Hill, Dewey & LeBoeuf LLP, New York, told BNA Jan. 28 that a coalition is being formed to comment on the uncertain tax positions development.
“The purpose of the coalition is to seek clarification and practical application of the rules,” he said. This proposal represents a sea change in the area of voluntary compliance. Companies are receptive to these changes. However, they want to ensure that the rules are transparent and pragmatic.”
He noted that the group is still forming, and expects to submit its comments in March.
The complete text of this article can be found in the BNA Daily Tax Report, February 3, 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.
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