Office of Chief Counsel Reports that Uncertain Tax Position Filings Were Lower Than Expected
In 2010, the Service issued Announcments 2010-9, 2010-7 I.R.B. 408, 2010-17, 2010-13 I.R.B. 515 and 2010-30, I.R.B. 2010-19 stating that it was in the process of developing a schedule requiring certain business taxpayers to report uncertain tax positions in a separate schedule with their tax returns and requested comments both on the proposal and on a draft schedule and instructions.
After the April 19, 2010 release of the first announcement and request for comments. The Service received a large number of comments on the overall proposal, including whether and how the Service should implement the requirement to file a schedule reporting uncertain tax positions, as well as the draft schedule and instructions.Many of the comments expressed concerns regarding how the Service would use the reported information, the interaction of the new reporting requirement with the existing policy of restraint, the additional burden the reporting requirement would place on affected corporations, and the impact the reporting requirement would have on the relationship between the corporation and the Service or the corporation and its advisors or independent auditors. Some commentators questioned the Service's authority to require reporting of uncertain tax positions with the corporation's tax return
The final schedule and instructions issued in Announcement 2010-75, issued on Septerm 24, 2010, removed several controversial proposals contained in the initially drawn UTP Schedule such as the elimination of the proposed maximum tax adjustment computation (which in many cases could exceed the taxpayer's financial statement reserves for uncertain taxes), elimination of requiring the reason and nature of the uncertainty to be set forth in a concise description of each uncertain position, the removal of reporting in reliance upon administrative tax positions, and a five-year phase-in of the reporting requirement based on a corporation's asset size with the initial filings to be made for companies with over $100 million in assets starting with 2010 tax years. The requirement for filing applies to public or privately held corporation which issued audited financial statements and file Form 1120, 1120-F, 1120-L or 1120-PC. The total asset threshold is reduced to $50 million commencing in 2012 tax years and then to $10 million in asset value starting with 2014 tax years. The Service is considering extending the Schedule UTP reporting to other taxpayers including pass-through entities and tax exempt entities.
As reported in the December 6, 2011 issue of Tax Notes Today, the Associate Chief Counsel (Procedure and Administration) issued a somewhat surprising comment that only $1,500 corporate returns had an attached Schedule UTP with their return. The average number or items listed by the coordinated industry case (CIC) taxpayers was only 3.2 positions. Non CIC companies filing the Schedule UTP average only 1.8 items on the schedule. A representative of the Chief Counsel’s Office may have felt a sense of both frustration and skepticism when quoted with saying “People have very few uncertain tax positions these days”. The areas most frequently noted on the UTP schedules filed involved research tax credits, ordinary and necessary business deductions and quite expectedly, transfer pricing issues under Section 482.
The Chief Counsel and Commissioner can’t be pleased with this limited and unexpected luke-warm response. Perhaps the Service will be less willing to back off proposed accuracy related penalties in issuing notices of deficiency or conceding such issues prior to trial when the item(s) being challenged by the Service were not reflected on the Schedule UTP. From another perspective, perhaps the taxpayers first subject to filing the schedule did not want to provide the Service with a detailed set of road maps as to every potential issue that could be challenged by the Service upon audit. This will make for some interesting Q&As at audit as to why items were left off the UTP Schedule.
It is certain (not “uncertain”) that the 2010 filing results and those received by the Service for 2011 returns will result in the Commissioner’s possible reassessment of the Schedule UTP itself or whether further reforms are needed.
