On January 26, 2010, the Internal Revenue Service (the "IRS") issued Announcement 2010-9 (the "Announcement"), which outlines its plan to require certain business taxpayers to annually disclose uncertain tax positions on their tax returns. As described further below, such disclosure is expected to be in the form of a schedule (the "Schedule") that includes a concise description of such positions and information regarding the potential impact of such positions on the taxpayer's federal income tax liability.


Taxpayers are not currently required to identify and explain uncertain tax positions on their federal income tax returns. In contrast, many business taxpayers are required by FASB Interpretation No. 48 (Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109) ("FIN 48") to identify and quantify uncertain tax positions for financial accounting purposes (and may be subject to other accounting standards with respect to uncertain tax positions). The IRS believes that the information developed in the course of complying with FIN 48 and other accounting standards would assist the IRS in focusing its audit resources toward tax returns containing uncertain tax positions of particular interest, or of sufficient magnitude, to warrant further inquiry. In furtherance of such goal, the IRS has issued the Announcement, which informs taxpayers of the proposed disclosure of uncertain tax positions on the Schedule and discusses, in general terms, the potential content of the Schedule.

Proposed Schedule

The Announcement provides that the IRS is currently developing the Schedule and that the Schedule will be required to be filed with the taxpayer's Form 1120 (U.S. Corporation Income Tax Return) or other business tax return. The Schedule will require:

  • A concise description of each uncertain tax position for which; and the taxpayer or a related entity has recorded a reserve in its financial statements; and
  • The maximum amount of potential federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer's assessment of its likelihood of prevailing on the merits with respect to such position).

The Schedule will not require the taxpayer's risk assessment or tax reserve amounts with respect to such positions.

Concise Description

The concise description to include in the Schedule must contain sufficient detail to permit the IRS to determine the nature of the issue. Although sufficiency will depend on the particular facts and circumstances, the IRS anticipates that each concise description will include the taxpayer's rationale for the position, as well as a general statement of the reasons for determining that the tax position is uncertain. According to the Announcement, to be sufficient, the description must contain:

  • The Internal Revenue Code sections potentially implicated;
  • A description of the taxable year or years to which the position relates;
  • A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
  • A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
  • A statement whether the position involves a determination of the value of any property or right; and
  • A statement whether the position involves a computation of basis.

Although not included in the Announcement, IRS Commissioner Dean Shulman stated in a speech before the New York State Bar Association that only a few sentences of pertinent information would need to be provided on the Schedule.

Maximum Federal Income Tax Liability

The Schedule will require a taxpayer to specify for each uncertain tax position the amount of federal income tax that would be due if such position were disallowed in its entirety on audit, taking into account all changes to items of income, gain, loss, deduction, or credit that would result from such disallowance.

Uncertain Tax Positions

For purposes of the Schedule, uncertain tax positions will not be limited to positions for which a tax reserve must be established under FIN 48 or other accounting standard, but rather, will include any position related to the determination of federal income tax liability for which a taxpayer or a related entity has not recorded a tax reserve because (1) the taxpayer expects to litigate the position or (2) the taxpayer has determined that the IRS has a current practice of not examining the position.

Taxpayers Required To File the Schedule

The Announcement provides that the IRS currently intends the Schedule to be filed by business taxpayers that have total assets in excess of $10 million and that have one or more uncertain tax positions. This includes not only those taxpayers that prepare financial statements, but also those that are included in the financial statements of a related entity that prepares financial statements, if that taxpayer or related entity determines its federal income tax reserves under FIN 48, or other accounting standards relating to uncertain tax positions involving federal income tax.

Importantly, although not entirely clear in the Announcement, the IRS has informally acknowledged that, as proposed, the reporting requirement is not necessarily limited to corporate taxpayers.

Effective Date and Other Related Matters

The IRS intends to require the Schedule to be included with tax returns filed after release of the Schedule. The IRS also anticipates publishing proposed regulations requiring applicable taxpayers to file the Schedule. Furthermore, the IRS is evaluating options for penalties to be imposed on taxpayers that fail to file the Schedule or that file inadequate disclosures, including lobbying Congress to enact legislation imposing such penalties.

The Announcement states that, except as described therein, the IRS intends to retain its existing policy of restraint for requesting tax accrual workpapers during audits (although noting that it will continue to review and modify such policy as it deems appropriate or necessary). In this regard, it is worth noting that the proposal would seemingly reduce the IRS' need to request tax accrual workpapers on audit because the Schedule would be included with the taxpayer's tax return and, therefore, be available to the IRS prior to audit.

IRS Request for Comments

The IRS intends to publish the Schedule "as quickly as possible," and therefore, invites public comment to the proposal through March 29, 2010. The IRS is particularly interested in comments regarding, among certain other topics specified in the Announcement, the scope of uncertain tax positions required to be disclosed, the information required to be disclosed, the manner in which information should be reflected on the Schedule, and potential alternative methods of disclosing the tax amounts at issue.

Concluding Thoughts

The proposal set forth in the Announcement is significant in a number of respects. Specifically, the proposal, if finalized, could significantly impact, among other things, the manner in which taxpayers prepare tax returns, which taxpayers the IRS elects to audit, the nature of the issues that the IRS raises during an audit, and the manner in which the IRS conducts audits. Given such potential impact, we expect that many questions (as well as objections) will be raised regarding this proposal (both generally and with respect to the specific information to be included on the Schedule).