IRS announces proposal for reporting uncertain tax positions

IRS announces proposal for reporting uncertain tax positions

The Internal Revenue Service on January 26 announced that it intends to require certain companies with assets in excess of $10 million to report their uncertain tax positions annually with their business tax returns. The proposed reporting requirement, as described in Announcement 2010-9, would apply to taxpayers who prepare financial statements, or are included in the financial statements of a related entity that prepares financial statements, if the taxpayer or related entity determines its United States federal income tax reserves under FIN 48, or other accounting standards relating to uncertain tax positions involving United States federal income tax. The Service is asking business taxpayers and others to submit comments on the proposal by March 29, 2010.

http://www.irs.gov/pub/irs-drop/a-10-09.pdf

Under the proposed reporting requirement, taxpayers would have to report positions for which a tax reserve must be established under FIN 48 or other accounting standards as well as positions related to the determination of any United States federal income tax liability for which the taxpayer or a related entity has not recorded a tax reserve because (1) the taxpayer expects to litigate the position, or (2) the taxpayer has determined that the Service has a general administrative practice not to examine the position. For this purpose, a related entity is any entity that is related to the taxpayer under Internal Revenue Code sections 267(b), 318(a), or 707(b).

A new schedule is being developed by the IRS to support the proposed new reporting requirement. According to Announcement 2010-9, the new schedule will ask taxpayers to provide:

• A description of each uncertain tax position “in sufficient detail so that the Service can determine the nature of the issue.” To be considered sufficient, the description would have to include: (1) the Internal Revenue Code sections potentially implicated by the position; (2) a description of the taxable year or years to which the position relates; (3) a statement that the position involves an item of income, gain, loss, deduction, or credit against tax; (4) a statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both; (5) a statement whether the position involves a determination of the value of any property or right; and (6) a statement whether the position involves a computation of basis.

• For each position, the entire amount of United States federal income tax that would be due if the position were disallowed in its entirety on audit. This amount is 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.

Notably, the proposal would not require disclosure of the taxpayer’s risk assessment or tax reserve amounts.

The Service is also considering various options for penalties or sanctions that may be imposed when a taxpayer fails to make adequate disclosure of the required information.

In prepared remarks to the to the New York State Bar Association Taxation Section Annual Meeting on January 26, IRS Commissioner Doug Shulman sought to alleviate the concerns that businesses and tax professionals are expected to voice about the proposal.

http://www.irs.gov/newsroom/article/0,,id=218705,00.html

“We could have asked for more – a lot more – but chose not to,” Shulman said. “We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions.”

— Donna Edwards

Tax Policy Group

Deloitte Tax LLP

The information contained is for general purposes only. The views expressed in this article are those of the author and do not constitute tax advice from or reflect the view of Deloitte & Touche LLP. Deloitte & Touche LLP assumes no responsibility with respect to assessing and/or advising the reader as to the respective tax consequences arising from circumstances relating to the reader's particular tax situation. It is recommended that the reader consult with their own tax advisor with regard to the application of the tax laws and resulting tax consequences relating to the reader's particular situation.