US IRS has been informing taxpayers of Schedule UTP non-compliance

EY is aware that the IRS has begun sending certain taxpayers letters stating that they have not complied with the rules for reporting an uncertain tax position (UTP). Specifically, the letters state that the Schedule UTP does not fulfill the requirements of a "concise description" for one or more reportable UTPs.

Background

In December 2022, the IRS finalized an updated Schedule UTP (pdf), Uncertain Tax Position Statement with accompanying instructions (pdf). Schedule UTP must be attached to Form 1120, U.S. Corporation Income Tax Return, Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, Form 1120-L, U.S. Life Insurance Company Income Tax Return or Form 1120-PC, U.S. Property and Casualty Company Income Tax Return, for a corporation that (1) has assets of at least $10m, (2) issues or is included in audited financial statements and (3) has one or more tax positions that must be reported on Schedule UTP.

Corporations must report federal income tax positions on Schedule UTP if two conditions are met. First, the corporation has taken a tax position on its US federal income tax return for the current or prior tax year. Second, the corporation or a related party (1) has recorded a liability for unrecognized tax benefits for that tax position for US federal income tax in audited financial statements, or (2) recognized the tax benefit for that tax position because the corporation expects to litigate the position.

Corporations attaching a Schedule UTP must include a concise description of the uncertain tax position with (1) the relevant facts affecting the tax treatment of the position, and (2) information that identifies the tax position, its amount, unit of account, and the nature of the controversy or potential controversy.

IRS UTP letters

The IRS has a centralized review team that reviews and evaluates all concise descriptions of UTPs to assess compliance with the Schedule UTP instructions. The review team will contact the taxpayer when information on the Schedule UTP does not meet the instruction's requirements. The letters issued by the IRS appear to stem from this team's review of taxpayer UTPs, and indicate the Schedule UTP is not compliant due to the lack of a concise description that includes enough detail to adequately describe the issue. The letters also forewarn that the IRS will be reviewing future Schedule UTPs, so the taxpayer must follow the form's instructions.

Implications

The IRS uses the Schedule UTP as a tool in conjunction with other risk analysis factors to identify the highest compliance risks among taxpayers and to assist in working audit issues effectively and efficiently. The IRS's issuance of the letters appears to be a compliance-driven effort to ensure taxpayers are reporting the appropriate UTP details. Accordingly, taxpayers should confirm that they are describing reportable UTPs with the requisite specificity to help prevent any future compliance issues.

Contact Information

For additional information concerning this Alert, please contact:

National Tax Department, International Tax and Transactions Services, Transfer Pricing

• Ryan J. Kelly, Americas ITTS Tax Controversy Leader

• Hiro Furuya

• Ameet Kapoor

• Carlos M. Mallo

• Marla McClure

• Donna McComber

• Mike McDonald

• Tom Ralph

• Craig Sharon

• Kent Stackhouse

• Heather Gorman

• Giulia Di Stefano

• Carolina Figueroa

• Mitch Gibson

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.