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Special Alert! IRS to Require Reporting of Uncertain Tax Positions with Returns
IRS to Require Reporting of Uncertain Tax Positions with Returns
In a surprise move aimed at providing greater transparency into potential audit issues, the Internal Revenue Service (IRS) issued Announcement 2010-9 Tuesday, which reveals its intent to require certain large taxpayers to provide information regarding their uncertain tax positions when filing their tax returns. Reporting would be mandatory for taxpayers who have a financial statement prepared under Financial Accounting Standards Board Interpretation No. 48 (FIN 48) (or other similar accounting standards) reflecting uncertain tax positions and assets exceeding $10 million.1

While many taxpayers are already subject to FIN 48 which addresses “accounting for uncertainty in income taxes”, taxpayers have not historically been required to identify and explain uncertain tax positions underlying their returns to the IRS. When FIN 48 was enacted, the IRS concluded that FIN 48 workpapers were tax accrual workpapers and were, therefore, subject to its longstanding policy of restraint in which they do not request such workpapers as part of a standard examination unless there were unusual circumstances.2 However, in a move away from the policy, the IRS is attempting to capitalize on the information developed in the course of complying with FIN 48 which it believes is “highly relevant to understanding the taxpayer’s tax positions and assessing how those positions affect the taxpayer’s tax liability.”3

The IRS is developing a schedule that would require eligible taxpayers to provide information about their uncertain tax positions that affect their US federal income liability. This schedule is to be filed with the Form 1120 US Corporation Income Tax Return. It would contain a number of facts that are intended to provide the IRS with sufficient detail to determine the nature of the issue as well as the maximum amount of potential federal tax liability attributable to the position. The following items regarding the uncertain tax position would be required in the schedule:
  1. The 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.
While it is difficult to anticipate the full ramifications of the new rules, it is highly likely the policy will lead to an increased number of transfer pricing audits by the IRS. Taxpayers would do well to solidify their transfer pricing policies and documentation.

The official issue date is yet unknown, but the IRS intends to publish the schedule as quickly as possible and mandate that eligible taxpayers include it with all returns filed after release of the schedule. The IRS invites the public to submit comments on the proposal by March 29, 2010. The Announcement in its entirety is available here: http://www.irs.gov/pub/irs-drop/a-10-09.pdf
[1] The Announcement does not indicate why the criterion of $10 million in assets was selected, or when this measurement threshold is to be taken.
[2] While this has been the IRS policy, the Supreme Court case of United States v. Arthur Young & Co., 104 S.Ct. (1984) confirmed that tax accrual workpapers were not subject to a work-product privilege or a work-product immunity.
[3] Part III – Administrative, Procedural, and Miscellaneous: Uncertain Tax Positions – Policy of Restraint; Announcement 2010-9, p. 3.
 
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