With Announcement 2010-9, the IRS proposes to require taxpayers to disclose “uncertain tax positions” on their tax returns. The disclosure must include a “concise description of those positions and information about their magnitude.”
A question arises as to whether the IRS jumped the gun on U.S. v. Textron. In Textron, the United States Court of Appeals for the First Circuit held that the IRS should have access to the taxpayer’s tax accrual workpapers. The First Circuit rejected the taxpayer’s argument that it prepared the workpapers in anticipation of litigation and could avail itself of the work product doctrine to avoid their disclosure to the IRS. The First Circuit found that the taxpayer prepared the workpapers to comply with securities laws and financial accounting purposes in the ordinary course of its business rather than in anticipation of litigation. Thus the taxpayer could not avail itself of the work product doctrine. The taxpayer has petitioned the U.S. Supreme Court for certiorari.
In the Announcement, the IRS states that information a taxpayer prepares to comply with FIN 48 or other accounting standards is relevant to the IRS’s understanding of the taxpayer’s tax positions. The information is also relevant to the IRS’s assessment of the tax positions’ effect on tax liability. The IRS proposes that taxpayers disclose the following information to the IRS:
- A “concise description” of each uncertain tax position for which the taxpayer or a related entity has recorded a reserve in its financial statements; and
- The maximum amount of potential tax liability attributable to each uncertain tax position (determined without regard to the taxpayer’s risk analysis of its likelihood of prevailing on the merits).
The IRS further prescribes the type of information constituting a “concise description” of an uncertain tax position. A concise description requires disclosure of:
- The Code sections the position implicates;
- The taxable year or years to which the position relates;
- A statement that the position involves income, gain, loss, deduction or credit;
- A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
- A statement as to whether the position involves a determination of the value of any property or right;
- A statement as to whether the position involves a computation of basis; and
- The maximum amount, for each position, that the taxpayer would owe in taxes if the IRS disallowed the position in its entirety on audit.
According to the Announcement, the disclosure requirement would apply to business taxpayers with total assets in excess of $10 million if the taxpayer has one or more uncertain tax positions. This includes taxpayers who prepare financial statements with federal income tax reserves under FIN 48 or other accounting standards.
The IRS requests comments on the Announcement by March 29, 2010. In particular, the IRS seeks comments on the following issues:
- How taxpayers should reflect the maximum tax adjustment on the schedule so that it provides the IRS with an “objective and quantifiable measure” of each tax position, such as dollar amount or dollar ranges;
- Alternative methods of disclosure for the amount at issue;
- Whether the maximum tax adjustment relates solely to the tax period of the return or to all periods for which the tax position relates, and whether taxpayers should take into account net operating losses of excess credits in determining the maximum tax adjustment;
- The application of related-entity rules; and
- Whether taxpayers should make the disclosure during examination as opposed to in their returns.
The Announcement demonstrates that the IRS is seeking ways to require greater disclosure from business taxpayers to more efficiently use its audit resources. Business taxpayers should prepare their tax accrual workpapers and other FIN 48 or similar materials with the understanding that the IRS may seek disclosure of all such documents on their returns or in an audit.