Uniform reporting of uncertain tax benefits (UTBs) began with the implementation of the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48) in 2007. The intent of FIN 48 was to require companies to disclose the tax benefits claimed on their tax return that may not be sustained if challenged by a tax authority (i.e., the Internal Revenue Service, or IRS). If not retained, such positions may be required to be repaid along with potential interest and penalties.
Following this change in book reporting, the IRS in 2010 introduced its own private tax reporting requirements of uncertain tax positions (UTPs). (Note: For our purposes, UTBs and UTPs are essentially interchangeable, with UTBs being the book terminology and UTPs being the IRS terminology.) Schedule UTP required reporting on UTPs by companies with assets of $100 million or more beginning in 2010. Through 2014, the Schedule UTP requirement was phased in for companies with assets exceeding or equaling $10 million. This phase-in was conceivably designed to allow smaller corporate taxpayers, typically with fewer resources, additional time to respond to the requirement.
The overarching purpose of Schedule UTP was to provide the IRS with insight into a company’s claimed benefits. However, the IRS simultaneously issued Announcement 2010-76, updating its policy of restraint, which states that companies may redact certain information pertaining to Schedule UTP, such as draft descriptions, amounts, and computations, when providing IRS auditors information regarding their UTBs. This policy of restraint was designed to give taxpayers comfort that their (unredacted) working papers used in compiling Schedule UTP could not be requested by the IRS during a tax audit. Apparently, the level of disclosure in Schedule UTP was seen as inadequate for the IRS; hence, the reporting requirements were expanded, to the disadvantage of the business community.
Schedule UTP
Changes to Schedule UTP were implemented for tax year 2022 reporting. The 2010 Schedule UTP was originally intended to include dollar amounts of each reported UTP. Such is evident in earlier drafts of the form as well as column (g) of the implemented form, which is noted to be “reserved for future use.” However, the implemented guidelines included a narrative description of each UTP, rank of the positions relative to one another in magnitude, and disclosure of whether the position is a major tax position. Since 2010, this schedule has provided information to the IRS to supplement the FIN 48 reporting requirements. Practitioners reacted to these 2010 guidelines by identifying two major concerns: (1) the administrative burden and (2) the potential ability for the IRS to use Schedule UTP as a “tax audit road map.”
After several years of companies providing this information to the IRS, the Treasury Inspector General for Tax Administration criticized the usefulness of Schedule UTP in its 2018 semiannual report to Congress. It recommended either modifying Schedule UTP to include information that’s useful for its intended purpose or removing the filing requirement. The IRS determined Schedule UTP should be expanded and not deleted.
The new 2022 Schedule UTP requirements include identification of the line item and amount from the tax return that relates to the UTP. This is a major change given the adamant pushback from practitioners against any inclusion of dollar amounts during the 2010 Schedule UTP implementation. Under these new requirements, the IRS isn’t requesting the UTP amount per se. However, it can gather additional information regarding the position to which the UTP relates, as well as the amount of said position. In addition, the expansion of reporting around specific guidance a company used to estimate its UTPs expands the practitioner concern of the “tax audit road map” they’re required to provide to the taxing authority.
Possible Remedy
As the business community continues to adapt to the new IRS guidelines for 2022 Schedule UTP, a possible remedy may arise from the IRS Compliance Assurance Process (CAP). The CAP program’s stated purpose is to assist large corporate taxpayers in federal tax compliance. Participating taxpayers can interact with the IRS to “resolve issues before filing tax returns…ensur[ing] accurate tax returns, [and] shortening the IRS audit process.”
The appeal of such a program lies in the ability to resolve tax uncertainty at the time of filing. Through communication with the IRS facilitated by the CAP program, taxpayers can come to agreements with the IRS on tax positions before filing a tax return. This shifts IRS resources from tax audits to CAP program reviews. With expanded Schedule UTP reporting requirements, the CAP program’s appeal may grow among Large Business and International Division tax filers. Such a shift could enable tax uncertainty to be largely resolved at the time of filing, enabling IRS resources to be reassigned from detection of noncompliance to prevention.
Launched in 2005, the CAP program has at times been limited to existing enrollees. Such was the case for 2017-2019; however, the IRS announced a reopening of the program for tax year 2020. It’s yet to be seen whether the new guidance will push taxpayers to enroll in the CAP program, which is currently open to new applicants. We will also need to wait to see whether IRS resources have been redeployed from detection to prevention efforts to facilitate any such increase in interest. What is clear is that the IRS is committed to reshaping the tax uncertainty resolution process, which adds a wrinkle in tax planning and reporting among large corporate taxpayers.
This is the last Taxes column authored and edited by Anthony P. Curatola.
© 2024 A.P. Curatola
February 2024
