On January 26, 2010, the IRS issued Announcement 2010-9, which explains that the IRS is developing a schedule that will require certain business taxpayers to report “uncertain tax positions” on their United States federal income tax returns. Business taxpayers who have total assets in excess of $10 million and prepare GAAP financial statements are affected.
The Announcement states that the schedule will require annual disclosure of uncertain tax positions in the form of a concise description of those positions and information regarding their magnitude; and that this schedule will be attached to the filer’s Form 1120 or other business tax return. More specifically, the schedule must include: 1) a concise description of each tax position for which the taxpayer or a related entity (as determined under Sections 267(b), 318(a), or 707(b) of the Code) has recorded a reserve in its financial statements, providing sufficient detail to permit the IRS to determine the nature of the issue; and 2) the maximum amount of potential federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer’s risk analysis regarding its likelihood of prevailing on the merits). For this purpose, “uncertain tax positions” will also be considered to include those for which a reserve was not recorded because the taxpayer either expects to litigate the position or has determined that the IRS has a general administrative practice not to examine the position.
At a minimum, the IRS contemplates that sufficient disclosure will involve the rationale for the position and a concise general statement of the reasons for determining that the position is an uncertain tax position, including: citations to relevant Code sections; listing of the tax years to which the position relates; and certain details regarding the specific position and how it affects the taxpayer’s tax liability.
In addition, the schedule will require taxpayers to specify, with respect to each uncertain tax position, the entire amount of United States federal income tax that would be due if the position were to be disallowed in its entirety on audit. This amount is the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction, or credit if the position is not sustained.
The IRS plans to publish a notice of proposed rulemaking providing that certain businesses otherwise required to make a return will be required to file a form or schedule relating to the disclosure of uncertain tax positions as part of its return in accordance with the forms, instructions, or other appropriate guidance provided by the IRS.
Penalties, Sanctions and Feedback
The Announcement further states that the IRS is currently considering options with regard to penalties or sanctions to be imposed upon taxpayers who fail to file the required schedule, and that one such option is to seek legislation imposing a penalty for failure to file the required schedule or make adequate disclosure.
The Announcement reflects that the IRS invites public comments on the proposal described within the Announcement.