An alternative explanation, however, is that the companies decreased their uncertain tax positions
prior to implementing FIN 48.
That is, one can take an uncertain tax position
that turns out to be wrong but is reasonable (non-negligent), thus avoiding the negligence penalty, but still have to pay the substantial understatement penalty.
EXHIBIT 1 When to Disclose an Uncertain Tax Position
: Four Scenarios Scenario Financial Tax Deferred Probability Uncertain Depreciation Depreciation Tax of Success Tax Expense Expense Liability Position (UTP) Accrual A $50,000 $ 50,000 - 100% - B $50,000 $100,000 $17,000 95% - C $50,000 $150,000 $34,000 60% $13,600 D $50,000 $200,000 $51,000 40% $51,000 Scenario Explanation A Not uncertain B Not material C 40% uncertain D 60% uncertain * In Scenario A.
The first two years of corporate income tax returns requiring Form 1120, Schedule UTP, Uncertain Tax Position
Statement, have been filed, and the IRS has described first-year returns and provided guidance for the growing number of business taxpayers that will be required to file it.
The IRS may impose penalties or sanctions when a corporate taxpayer fails to make adequate disclosure of the required information regarding its uncertain tax positions
. In the instructions to Schedule UTP, the IRS provides several examples about the disclosures and concise descriptions.
"It would add efficiency to the process if we had access to more complete information earlier in the process regarding the nature and materiality of a taxpayer's uncertain tax positions
," Shulman said.
The purpose of this article is to review recent judicial, regulatory, and administrative changes that have shifted the burden to the taxpayer to disclose uncertain tax positions
. In addition, the IRS has leveraged FASB Interpretation 48 (FIN 48, which has been codified as ASC [Accounting Standards Codification] 740-10) financial reporting rules that require companies to establish tax reserves.
24, 2010, the IRS announced that it was expanding its policy of restraint in connection with its decision to require certain corporations to file Schedule UTP and that it will forgo seeking particular documents that relate to uncertain tax positions
and the workpapers that document the completion of Schedule UTP (Announcement 2010-76).
In late January 2010, the IRS formally proposed (Announcement 2010-9) a new requirement that certain business filers submit, along with their annual corporate income tax returns, a schedule of "uncertain tax positions
," including concise descriptions of each and estimates of their magnitude.
* FIN 48 requires a company to include a potential tax penalty in its FIN 48 reserve for a particular uncertain tax position
unless the company can demonstrate that the position satisfies the minimum legal standard for avoiding the penalty.
(1) In January 2010, the IRS announced a proposal to require large corporations to report uncertain tax positions
on the new Schedule UTP, Uncertain Tax Position
Statement, to be filed with their annual tax returns.
[Note: On April 22, 2011, the Institute submitted comments and recommendations for additional guidance about the reporting requirements for uncertain tax positions
on Schedule UTP, Uncertain Tax Position