On September 24, 2010, the Internal Revenue Service (IRS) released the final U.S. tax schedule for reporting uncertain tax positions (Schedule UTP) together with important guidance regarding its implementation. In general terms, Schedule UTP requires U.S. and non-U.S. corporations that file certain types of U.S. federal income tax returns to disclose specific U.S. tax positions taken on those tax returns if the corporation or a related person has recorded a reserve on its audited financial statements with respect to such positions. This new disclosure obligation represents a significant extension of the IRS’s strategy of enhancing taxpayer transparency and is driven by “the fundamental principle that transparency is essential to achieving an effective and efficient self-assessment tax system,” in the words of Douglas Shulman (IRS Commissioner). The September 24 guidance includes several very important changes to the previously issued draft Schedule UTP and represents significant effort on the part of the IRS to respond to concerns expressed by taxpayers and tax professionals regarding the proposal. The final Schedule UTP must be filed by certain corporate taxpayers with more than $100 million in assets as an attachment to their 2010 income tax return (for calendar year taxpayers) and for taxable periods that begin in 2010 and end in 2011 (for fiscal year taxpayers).

The Schedule UTP Proposal

On January 26, 2010, the IRS issued Announcement 2010-9, introducing a proposal to require certain corporate taxpayers to disclose uncertain tax positions on a prescribed schedule to be attached to their U.S. federal income tax returns. A draft of Schedule UTP (and its accompanying instructions) was released by the IRS on April 19, 2010. Following the release of the draft Schedule UTP, the IRS received an unusually large volume of comment letters addressing issues ranging from technical aspects of the form itself, the interaction of Schedule UTP disclosures with the IRS policy of restraint, and the effect of Schedule UTP disclosure on privilege and the work-product doctrine. On September 9, 2010, the IRS and the Treasury Department issued proposed regulations that would provide regulatory authorization for the IRS to require the filing of Schedule UTP. A final version of this proposed regulation is expected to be issued prior to the end of 2010. The basic elements of the Schedule UTP proposal are set out in our Osler Update of January 28, 2010.

In general, the draft Schedule UTP was to apply to corporate taxpayers that satisfied each of the following requirements: (1) the corporation filed Form 1120 (U.S. Corporation Income Tax Return), Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) or certain other prescribed corporate tax returns; (2) the corporation had at least $10 million of assets; (3) the corporation or a related party issued audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year; and (4) the corporation had one or more tax positions to be reported on Schedule UTP.

Final Schedule UTP and Related Guidance

Speaking to the American Bar Association (ABA) conference in Toronto on September 24, 2010, Commissioner Shulman announced the release of a final Schedule UTP and related instructions. The Commissioner restated that the core objectives of Schedule UTP include: efficiency of tax administration, earlier certainty regarding tax obligations for taxpayers and consistency among taxpayers. The Commissioner also expressed the view that the final Schedule UTP integrated these stated objectives with the concerns expressed by taxpayers in a “balanced and sensible fashion.” In addition to releasing a final form of Schedule UTP (and accompanying instructions) for 2010, the IRS also released the following related Schedule UTP guidance on September 24:

  • Announcement 2010-75: addresses public comments to the prior draft Schedule UTP and discusses changes adopted by (or not adopted by) the IRS in response to the public comments;
  • Announcement 2010-76: announces an expansion of the IRS’s policy of restraint in connection with the implementation of Schedule UTP; and  
  • Internal IRS Directive: provides an internal directive issued to IRS examination and research personnel regarding the use of information reported on Schedule UTP and establishes a procedure for centralizing the initial processing of Schedule UTP information.

Key Developments

The following changes are, in our view, of particular importance to Canadian corporations with U.S. subsidiaries or U.S. operations.

Five-Year Phase-In of the Schedule UTP Reporting Requirement

The draft Schedule UTP was originally to apply to certain corporations with assets of $10 million or more. In response to taxpayer comments that compliance with Schedule UTP was “too much too soon” for smaller corporations, the IRS has implemented a five-year phase-in of Schedule UTP. Specifically, corporations that meet all of the other requirements listed above with total assets equal to or exceeding $100 million must file Schedule UTP beginning with the 2010 tax year (or for fiscal year taxpayers, their first taxable period ending in 2011). The total asset threshold will be reduced to $50 million beginning with the 2012 tax year, and to $10 million beginning with the 2014 tax year. For Canadian corporations that file IRS Form 1120-F (even if filed on a protective basis), this asset threshold will be applied by reference to the corporation’s worldwide assets (i.e., not just its U.S.-based assets) as reported on Schedule L, Line 17 of IRS Form 1120-F.

The IRS also stated that it will consider whether to extend all or a portion of Schedule UTP reporting to other taxpayers, such as pass-through and tax-exempt entities, for 2011 or later tax years.

No Reporting of a Maximum Tax Adjustment

In response to taxpayer comments, the final Schedule UTP and instructions no longer require taxpayers to report a “maximum tax adjustment” for uncertain tax positions. The draft Schedule UTP had required taxpayers to indicate the maximum U.S. federal income tax liability for each disclosed tax position (other than transfer pricing or valuation tax positions, which were required to be ranked in order of magnitude) if the position was not sustained upon examination by the IRS. In lieu of this requirement, the final Schedule UTP only requires taxpayers to rank all of the reported tax positions (including transfer pricing and valuation positions) based on the U.S. federal income tax reserve associated with that position. In addition, taxpayers are required to specially designate so-called “Major Tax Positions” which are tax positions for which the reserve exceeds 10% of the aggregate amount of the reserves for all of the tax positions reported on the Schedule. Disclosure of the actual amounts of the tax reserves is not required.

No Reporting of Rationale and Nature of Uncertainty

The draft Schedule UTP and related instructions required taxpayers to provide a “concise description” of each uncertain tax position that included “the rationale for the position and the reasons for determining the position is uncertain.” Taxpayers and tax professionals expressed concern that this information was too closely intertwined with the legal analysis of the taxpayer or its advisors which, in many cases, was information that may be subject to attorney-client privilege. Commentators also expressed concern that the IRS may seek to assert that disclosure of this nature on Schedule UTP constitutes so-called subject matter waiver which could result in the waiver of privilege or work-product protection for all communications or documents related to the same underlying tax issue disclosed on Schedule UTP. The IRS has attempted to address these concerns by scaling back the information that a taxpayer is required to convey in its “concise description” of each uncertain tax position. In particular, the revised schedule requires taxpayers to provide “a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the IRS of the identity of the tax position and the nature of the issue.” The instructions expressly provide that the description “should not include an assessment of the hazards of a tax position or an analysis of the support for or against the tax position.”

Expansion of Policy of Restraint

As an additional measure for addressing taxpayer concern regarding the interplay of Schedule UTP and the law of evidentiary privilege, the IRS has modified and clarified its existing “policy of restraint.” Before modification, the IRS’s policy of restraint (embodied in Announcement 2002-63 and Internal Revenue Manual Section established that the IRS would not, in the ordinary course of examination, request tax accrual work papers except in unusual circumstances or in certain cases where the taxpayer engages in one or more transactions that are designated as listed transactions under applicable United States Treasury Regulations. The changes put forward in Announcement 2010-76 represent a very significant change in the administrative approach of the IRS with respect to privileged documentation and help address some of the concerns expressed by taxpayers. In particular, the policy of restraint has been modified or clarified in the following ways:

  • The IRS indicated that if a taxpayer provides a document that is otherwise privileged (under the attorney-client privilege, the tax advice privilege provided in Section 7525 of the Code, or the work product doctrine) to an auditor as part of an audit of the taxpayer’s financial statements, it would not assert during an examination that such disclosure constitutes a waiver of the privilege (this undertaking would not apply, however if, (a) the taxpayer had otherwise waived privilege, or (b) there were unusual circumstances or the taxpayer had engaged in one or more listed transactions and tax accrual work papers had been requested by the IRS);
  • In connection with a request by the IRS for tax reconciliation work papers, the IRS announced that taxpayers will be entitled to redact certain information related to the preparation of Schedule UTP, including drafts of the concise description of tax positions reported on the Schedule, computations related to the determination of the amount of reserves booked in connection with a particular tax position and the ranking of a tax position reported on Schedule UTP; and
  • The disclosures required on Schedule UTP do not otherwise affect the policy of restraint.

The IRS also clarified that the positions outlined in Announcement 2010-76 merely articulate the policy of the IRS on examination and are not intended to affect, or create any inference regarding, the application or scope of the attorney-client privilege or the work-product doctrine protection generally.

Sharing Schedule UTP Information with Foreign Taxing Authorities

Many non-U.S. corporations expressed a concern that information disclosed to the IRS on Schedule UTP may be inappropriately delivered to foreign taxing authorities pursuant to exchange of information provisions contained in United States Tax Treaties. For example, Article XXVII(1) of the Canada-U.S. Tax Treaty requires the IRS to share with the CRA “such information as may be relevant” to the administration of the domestic laws of the Contracting States, subject to certain limited exceptions provided in Article XXVII(3). In a clear attempt to address these concerns, the IRS has provided taxpayers with comfort that it would not routinely provide information reported on Schedule UTP to other governments. In particular, in Announcement 2010-75, the IRS indicated that it intends to “generally refrain” from providing Schedule UTP information to foreign governments unless “there is a reciprocal arrangement with the foreign government regarding uncertain-tax-position information, such as where the foreign government collects similar information for its own tax administration purposes and agrees to make this information available to the Service in a similar manner.” Furthermore, even if such reciprocity exists, the IRS indicated that it would consider the relevance of the information to the foreign government which, it speculated, “in many cases would not be present.” To further emphasize this point, in his remarks to the ABA on September 24, Commissioner Shulman assured taxpayers that it “would be very, very rare to exchange such information unless the requesting government has similar information it can make available to the IRS.”

Other Clarifications and Guidance

In addition to the major changes highlighted above, the IRS also clarified its position on several other issues related to the implementation of the Schedule UTP regime, including:

  • Clarification that Schedule UTP requires the reporting of U.S. federal income tax positions, not foreign or state tax positions.
  • Clarification that tax positions taken in years before 2010 need not be reported in 2010 or a later year.
  • Elimination of the proposed requirement to report tax positions for which no reserve was created because the corporation determined it was the IRS’s administrative practice not to raise the issue during an examination.
  • The final Schedule UTP instructions do, however, retain the requirement to report tax positions for which no tax reserve is taken if the taxpayer determines the probability of settling with the IRS is less than 50% and, under the applicable financial accounting standards, no reserve was established because the taxpayer intends to litigate the tax position and has determined that it is more likely than not that it would prevail in litigation based on the merits of the position.
  • Notably, the guidance released on September 24 did not contain any clarification regarding the imposition of penalties for non-compliance with Schedule UTP.


Taxpayers who are obligated to file Schedule UTP for the 2010 taxable year will have a number of unique and difficult issues to consider in the course of preparing this Schedule. While the final Schedule UTP, associated instructions and other guidance issued on September 24 go a long way toward addressing certain key areas of concern, there are a number of aspects of the regime that remain unclear.

First, certain aspects of the interaction between the law of privilege and work-product protection in the United States and Schedule UTP disclosure remain obscure. The scope of evidentiary privileges such as the attorney-client privilege, the work-product doctrine and the circumstances under which they may be waived (as well as the scope of any such waiver) are subject to significant uncertainty under prevailing U.S. law and have been the subject of recent high profile decisions in the United States including, most notably U.S. v. Textron Inc., 104 AFTR 2d 2009-5719 (1st Cir. 2009) and U.S. v. Deloitte, LLP, 106 AFTR 2d 2010-5053 (D.C. Cir. 2010). In light of this uncertainty, many taxpayers have expressed concern that disclosure of issues on Schedule UTP may constitute a waiver of privilege that may have otherwise applied to documents or communications related to the disclosed tax position and, accordingly, have been considering whether it is appropriate and acceptable to withhold information from Schedule UTP on the grounds of privilege.

The elimination of the requirement to provide a “concise description” of the rationale for why a position is uncertain should help alleviate some of these concerns because taxpayers are less likely to disclose the nature or content of any confidential legal advice received in respect of that position. However, because the mere identification of an issue on Schedule UTP necessarily imports the taxpayer’s bottom line conclusion that the position is “uncertain” (which is itself a determination that may be founded on confidential legal advice received from a tax advisor), there is some residual uncertainty about whether disclosure of the identity of the issue itself on Schedule UTP may constitute waiver. Similarly, the expansion of the IRS policy of restraint may provide taxpayers with greater practical comfort that Schedule UTP compliance will not constitute a waiver of privilege. The comfort delivered in the expanded policy of restraint is diluted, however, by virtue of the fact that it represents only self-imposed restraint by the IRS in the context of examinations (e.g., it does not necessarily apply in the context of litigation) and doesn’t apply if there are “unusual circumstances” or the taxpayer engages in one or more listed transactions. In light of these limitations to the policy of restraint, it is possible that some taxpayers may still be concerned about the possibility of Schedule UTP compliance giving rise to waiver and whether or not it is appropriate to withhold information from Schedule UTP based on a claim of privilege.

Second, Canadian corporate taxpayers who may have been concerned that the IRS would share information collected through Schedule UTP with the CRA pursuant to the Exchange of Information Article of the Canada-U.S. Treaty should derive some comfort from the IRS’s undertaking to “generally refrain” from providing such information to other governments unless that government can provide reciprocal information. There is some uncertainty, however, about the interaction of this undertaking and the terms of the Canada-U.S. Treaty. In particular, the undertaking put forward in Announcement 2010-75 appears to address situations in which the IRS has discretion under the relevant treaty to make information available to the other country. Article XXVII(1) of the Canada-U.S. Treaty imposes an obligation to share certain tax information unless one of the exceptions provided in Article XXVII(3) applies, in which case the tax information may be shared at the discretion of the relevant country. Therefore, in cases where one of the exceptions in Article XXVII(3) does not apply, it appears that the IRS would be obligated to provide available tax information to Canada and the IRS’s undertaking put forward in Announcement 2010-75 may not apply. Notwithstanding this limitation, if the information collected by the IRS on Schedule UTP is not obtainable under the laws or in the normal course of administration of the laws of Canada within the meaning of Article XXVII(3) of the Treaty, then the IRS undertaking to “generally refrain” from providing such information should be operative. Accordingly, Canadian corporate taxpayers required to disclose information that is relevant to their Canadian tax positions should take into account relevant considerations of Canadian law relating to privilege in the course of complying with Schedule UTP disclosure requirements.

Finally, it is interesting to note that the expansion of the IRS policy of restraint appears, in certain respects, to bring the U.S. practice relating to attorney-client privilege in the tax area into closer conformity with the Canadian rules of privilege. In particular, the Canadian law of attorney-client privilege recognizes a concept of “limited waiver” pursuant to which disclosure of otherwise privileged information to an auditor pursuant to the auditor’s statutory right to receive that information does not constitute a waiver of privilege. By contrast, prior to the modification of the policy of restraint described above, the disclosure of privileged communications outside the privileged attorney-client relationship ( including communication to an independent auditor) was generally considered to constitute a waiver of privilege under applicable U.S. law. The undertaking by the IRS to refrain (within certain parameters) from asserting that provision of privileged documents to an independent auditor constitutes a waiver of such privilege is an important development that narrows the practical significance of this asymmetry between Canadian and U.S. rules of privilege, at least at the examination stage (taxpayers should be aware, however, that the IRS undertaking does not necessarily apply in the context of litigation and, in any event, it is only a only a self-imposed policy of the IRS and doesn’t affect the law of privilege in the United States).