IRS proposes required taxpayer disclosure of uncertain tax positions
The Service has announced a proposal to require certain business taxpayers to disclose uncertain tax positions at the time they file their returns. Unofficial comments subsequent to the issuance of the announcement indicate that any such new requirement would not be effective for tax year 2009 returns.
Tax payers will not be required to disclose their risk assessment or tax reserve amounts; however, the IRS notes that it can compel production of that information via summons. The announcement also states that, except as provided in the announcement, the Service intends to retain its existing policy of restraint for requesting tax accrual workpapers during the course of examinations described in IRM 4.10.20.
The announcement also provides that the Service is evaluating additional options to impose penalty and sanctions if a taxpayer fails to adequately disclose the required information on its uncertain tax positions, including seeking legislation.
New Schedule Proposed
The Service said it is developing a new schedule intended for use by business taxpayers with assets over $10 million. The schedule will require (1) a concise description of each uncertain tax position for which the taxpayer or a related entity has recorded a reserve, and (2) the maximum amount of potential federal tax liability attributable to each position (determined without regard to the taxpayer's risk analysis of its likelihood of prevailing on the merits).
The announcement indicates that in addition to those positions for which a tax reserve must be established under FIN 48 (primarily codified in ASC 740-10), or other accounting standards, reporting will be required for any position related to the determination of U.S. federal income tax liability for which the taxpayer or a related entity has not recorded a tax reserve because it either expects to litigate the position or has determined that the IRS has a general administrative practice not to examine the position.
Concise description
The IRS contemplates that the required concise description will include the rationale for the position and a concise general statement of the reasons for determining it is an uncertain tax position, the Code sections potentially implicated by the position, a description of the tax year(s) to which the position relates, as well as statements about certain details of the position. Specifically, those details include:
- 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 whether the position involves the determination of the value of any property or right; and
- A statement whether the position involves a computation of basis.
Maximum tax liability
The announcement explains that taxpayers would also be required to report on the schedule for each position the entire amount of federal income tax that would be due if their position were disallowed in its entirety on audit. This would be the maximum tax adjustment for each position reflecting all changes to income, gain, loss, deduction, or credit if the position is not sustained.
Comments Requested
The IRS requests comments on the proposal described in the announcement, and those comments should be submitted by March 29, 2010.
Implications
The announcement represents a significant increase in the information required to be disclosed by affected taxpayers. The comment period is expected to result in extensive dialog with the IRS to address the range of implementation issues and the implications for taxpayers.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
