In the past, corporations could take uncertain tax positions on their tax filings and leave it at that.
But under Schedule UTP (Uncertain Tax Positions) proposed by the IRS on April 21, corporations will have to take it a step further as they will be required to disclose the uncertain tax positions that they have taken on their tax returns and provide to the IRS a clear and concise statement of the issues involved and the code section related to it, says John Brogan, a shareholder at Burr Pilger Mayer.
“An uncertain tax position is any position that is not more likely than not to be sustained upon audit by the IRS,” Brogan says. “If there’s not a 51 percent chance of it being sustained by the IRS, then it is going to be an uncertain tax position.”
Smart Business spoke with Brogan about what the new rule will mean for corporations and their tax filings.
What will the proposed change mean for businesses?
Businesses will need to pay more attention when their financial statements are being prepared, and they will have to pay a great deal of attention to any reserves that are established for uncertain tax positions.
It will take more time and more effort, because it actually rolls backward. Normally, audited financial statements would be prepared in a short period after the close of the corporation’s fiscal year and the tax return would be prepared later. The Schedule UTP relates to the tax return, but what gets disclosed on the schedule is going to directly relate to the determination of what went into making financial reserves as much as six months earlier.
The thing that is surprising is that historically there were very few areas where disclosure of aggressive tax positions was required, notably when taxpayers take positions that are contrary to Treasury regulations. There’s also a disclosure requirement for companies involved in listed transactions (i.e. structured tax shelters)
But what’s required for disclosure under Schedule UTP includes a much broader range of transactions, things that it would be easy for a taxpayer to not even identify as uncertain tax positions. There are a lot of novel situations, and no rules that are necessarily controlling the tax treatment of that.
Although the schedule has only been proposed by the IRS, I predict it will be effective for 2010 tax returns because it will be difficult for the IRS to back down on this position.
