On January 26, 2010, the Internal Revenue Service released its Announcement 2010-9, in which it announced its intention to require many business taxpayers to disclose their “uncertain tax positions” directly on their federal income tax returns. This new requirement would apply to business taxpayers with total assets above $10M and who are subject to FASB Interpretation No. 48 (“FIN 48”). Such taxpayers would be required to file a schedule, along with their income tax return, which would provide a concise description of each uncertain tax position for which that taxpayer, or its related entities, recorded a reserve on its financial statements. The taxpayer would also have to disclose the maximum amount of potential federal income tax liability attributable to its position. Furthermore, the taxpayer would be required to disclose any tax position for which a reserve was not recorded because either a) the taxpayer expects to litigate the position or b) the taxpayer determines that the IRS has a general administrative practice not to examine that position.
The disclosure of each tax position would need to contain sufficient detail to allow the IRS to determine the nature of the issue. The description would also need to contain the rationale for the taxpayer’s position and a concise statement of the reasons for determining that the position is an uncertain tax position. To be sufficient for these purposes, the description must contain:
A. The Internal Revenue Code Sections implicated by the position;
B. A description of the taxable year or years to which the position relates;
C. A statement whether the position involves an item of income, gain, loss, deduction, or credit against tax;
D. A statement whether the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
E. A statement whether the position involves a determination of the value of any property or right; and
F. A statement of whether the position involves a computation of basis.
Finally, the disclosure would require a taxpayer to specify, for each uncertain tax position, the entire amount of federal income tax that would be due if the position was disallowed by the IRS in its entirety. This would include the maximum tax adjustment for the position, reflecting all changes to gains, losses, income, deductions, or credits if the tax position were not sustained.
The IRS intends to require filing of this new disclosure schedule for all returns filed after the IRS releases the final schedule.
A few additional points regarding the IRS Announcement are worth noting. First, there is no materiality requirement to the disclosure requirement. The IRS intends to require a description of each uncertain tax position, even if only a very small reserve was recorded for that position. Second, taxpayers would be required to state the maximum potential federal tax liability attributable to each uncertain tax position, even though the reserve recorded for that position may be less than the maximum amount due to adjustments for risk.
The IRS Announcement indicates the IRS will continue its policy of restraint with respect to requesting tax accrual workpapers. However, because the IRS would be given most of the information available within the tax accrual workpapers on its proposed new schedule, this policy of restraint may be inconsequential.
Within the Announcement, the IRS stated that it anticipates publishing a notice of proposed rulemaking to create formal regulations to enforce this disclosure requirement. The IRS is also evaluating additional options for penalties or sanctions if a taxpayer fails to make adequate disclosure of the required information regarding its uncertain tax positions. One option being considered is to seek legislation imposing a penalty for failure to file the new schedule or make adequate disclosure of uncertain tax positions.
The McGrath North Tax Group will be closely monitoring the developments in this area and intends to report on this topic in future newsletters. The IRS Announcement was made after the IRS’ victory in the First Circuit case of U.S. vs. Textron, Inc., in which the IRS’ request for tax accrual workpapers was upheld as valid. The Textron decision has been widely criticized and has been appealed by the taxpayer to the U.S. Supreme Court. The U.S. Supreme Court has not yet indicated whether it will hear the Textron appeal.