IRS will require disclosure of uncertain positions on tax returns of businesses with more than $10 million in assets.

On January 26, the IRS issued Announcement 2010-9, announcing that the IRS intends to develop a new schedule to be attached to the returns of businesses having more than $10 million in assets, on which they will be required to report their "uncertain tax positions." This requirement can be expected to change significantly the depth and breadth of IRS examinations.

The IRS uses as a springboard for this new requirement the fact that many taxpayers are required, for financial accounting purposes under FIN 48, to identify and quantify tax positions for which they have reserved. The Announcement states the obvious: "[T]he information developed in the course of complying with FIN 48 . . . would aid the Service in focusing its examination . . . as well as allowing examination teams to identify all of the issues underlying the tax returns more quickly and efficiently."

In general, it is expected that the schedule would call for:

  • a concise description of each tax position for which a reserve has been recorded;
  • the maximum amount of potential tax liability attributable to each position; and
  • a statement of the legal rationale for the position.

The new disclosure requirement, once finalized, would elicit more information from more taxpayers about their uncertain positions than the IRS can glean currently through the FIN 48 requirements. It will call for a breakout of the specific dollar-amount at issue for each position, whereas FIN 48 disclosures frequently aggregate amounts. Also, the FIN 48 disclosure requirements do not call for a discussion of the legal rationale for a position.

Most importantly, the IRS will have a computer-searchable database of the uncertain tax positions of all taxpayers with more than $10 million in assets, rather than merely the SEC filings of public companies making FIN 48 disclosures. This will enable the IRS to identify quickly those taxpayers having uncertain positions that might not otherwise have attracted an audit. Thus, the IRS won't just have the "roadmap" that FIN 48 was accused of providing - it will have "GPS."

Although the proposed schedule would require disclosure of the amount of tax that the taxpayer would owe if the uncertain position were disallowed, the IRS Commissioner stated specifically that the schedule "would not require that taxpayers disclose how strong or weak they regard their tax positions or the amount they reserved on the books regarding those positions." Thus, it is not expected that the schedule would require disclosure of tax accrual workpapers that contain an analysis of the risk of disallowance of taxpayers' uncertain tax positions. The Announcement closes with a call for comments on the proposed disclosure schedule and a flood of comments are expected.

Gardere has well-recognized expertise in FIN 48 and accounting for uncertain tax positions. Its attorneys have authored a widely-circulated treatise on the topic. Gardere is hosting a webinar on Uncertain Tax Positions on February 25. To register for the webinar, click here.