by Linda Beale
The IRS released its draft schedule and instructions for the new initiative (announced late in January by Commissioner Shulman and set forth in Ann. 2010-9) for disclosure on new Schedule UTP on uncertain tax positions for taxpayers with assets of $10 million or more. The release, Ann. 2010-30 [Download Ann.2010-30. uncertain tax positions], invites comments and indicates that these draft forms and instruvtions will not be finalized until after the comment deadling of June 1, 2010, and after the IRS has had time to review all of the comments on the proposal and the documents. REITs, RICs, partnerships and tax exempt organizations are not required yet to file Schedule UTP.
One of the issues the IRS is considering is the extent to which the new form for uncertain tax positions ( Schedule UTP [Download Schedule UTP form]) duplicates information required through other disclosure initiatives (such as the reportable transaction rules and Schedule M-3, the revised form for reconciling financial statement (book) and tax differences).
(Of course, the recent financial accounting changes set forth in “Fin 48” have also led to revelations through financial accounting that are relevant for tax consideration. See, e.g., expedited resolution of uncertain tax positions-LMSB intiative to address certain implications of Fin 48.”)
The rules generally require taxpayers to report positions if they made a decision to record a reserve 60 days or more before the filing of the return (or a decision not to record a reserved because of an expectation of litigation or in reliance on an IRS administrative practice). Although the reporting requirement is supposed to apply to current and prior year tax positions, the IRS instituted a particularly taxpayer friendly transition rule by providing that prior years’ tax positions need not be reported in the first year of the new reporting requirement. In other words, prior year’s uncertainties are essentially “grandfathered”. See Schedule UTP draft instructions released today [Download Schedule UTP Draft Instructions].
Why would practitioners and corporations object to a new disclosure requirement? Primarily because it will further eliminate the uneven playing field in which insiders have the scoop on the taxpayer’s positions and how aggressive the taxpayer has been in filing the return, while the IRS has to try to figure everything out from afar. For the IRS, it’s like trying to pinpoint the burrow of a mole from outerspace–without sufficient disaggregated information about the taxpayer’s transactions and positions taken in respect of those transactions, the chance of finding items on audit is significantly reduced. Corporate taxpayers with aggressive positions like it that way, of course, since it gives even frequently audited companies a version of the audit lottery–not whether there will be an audit, but whether the audit will be able to uncover the most aggressive tax positions taken and understand what it has discovered if it does. I have argued that the pre-return tax advice should be considered business advice–accountants engage in those advising services as much as lawyers so it should not be eligible for attorney-client privilege. Workproduct protection shouldn’t be available, because anything prepared at this stage is prepared for inclusion on the return (directly, or as background information for what is included directly) and that business and regulatory use precludes the litigation focus that underlies work product protection. The reporting of uncertain tax positions makes sense in this context.