On September 24, 2010, IRS Commissioner Douglas Shulman, addressing the American Bar Association’s Joint Meeting of the Tax Section and Real Property Trusts & Estates Section in Toronto, announced that IRS was releasing the final version of Schedule UTP1 for the 2010 tax year, its Instructions,2 plus further guidance.3 The guidance takes the form of Announcement 2010-75, Announcement 2010-76, and an internal directive.4 While there is a hearing on October 15, 2010, on the proposed regulations recently announced,5 these last pieces of guidance6 appear to set out the basic ground rules under which reporting of uncertain tax positions (UTPs) will be made in the upcoming tax filing season.

Corporations That Must File Schedule UTP

A corporation is required to file a Schedule UTP if it: (a) has assets that equal or exceed $100 million (subject to a phase-in, described below); (b) has taken a tax position on its U.S. federal income tax return for the current year (or for returns after 2010, a prior tax year) for which the corporation or a related party had audited financial statements reporting the corporation’s operations for all or part of the tax year; and (c) either recorded a reserve with respect to that tax position on the audited financial statements or did not do so because the corporation expected to litigate the position. Schedule UTP is not required for pass-through or taxexempt entities.

Notable Changes in the Final Schedule UTP

The major changes in the final Schedule UTP, as compared to the draft Schedule UTP, are:

  • On the draft Schedule UTP, there was no phase-in for corporations with assets equal to or exceeding $10 million but below $100 million. On the final Schedule UTP, only corporations with assets equal to or exceeding $100 million are required to file the Schedule, while in 2012, corporations with assets equal to or exceeding $50 million will be required to file the Schedule, and in 2014, corporations with assets equal to or exceeding $10 million will be required to file the Schedule;
  •  The final Schedule requires UTPs to be ranked on the Schedule according to the amount of the federal income tax reserve reported in the financial statement but not the maximum tax adjustment for that position, and those UTPs for which no reserve was established because of an expectation to litigate may be assigned any rank. Taxpayers must specifically identify transfer pricing adjustments and any position that exceeds ten percent of the total amount of all the reserves on the schedule;
  •  The final Schedule does not require reporting of UTPs for which no reserve was established because the IRS was believed to have an administrative practice of not challenging the position;
  •  The final Schedule does not require reporting of the “rationale and nature of the uncertainty.” Only a concise description of the position is required; and
  •  Reporting of UTPs for years prior to 2010 is not required.

Instructions to Schedule UTP

The instructions clarify that the reporting of foreign tax positions is required only if they lead to a reserve for an affected U.S. federal income tax position (e.g., a foreign tax credit). In response to worries that IRS would freely exchange Schedule UTP with foreign tax authorities, the IRS promises to refrain from doing so and emphasizes its reliance on information exchange rules that require reciprocity and relevance.

The instructions also clarify that the ranking of current and (after 2010) prior tax year UTPs by size of reserve will combine all the current and prior year UTPs in a single ranking.

The instructions also give several examples of reporting (and non-reporting) situations, including the following. A US corporation must report a UTP for the reserve established by a foreign related party that does not file a US income tax return. A multi-year UTP is reported only in the year(s) in which a reserve is recorded. An uncertain income inclusion in either of two years is reported in both years because its inclusion in one year and its omission in the other year are reporting positions. If the corporation believes it is more likely than not unable to settle the issue but more likely than not to prevail in litigation, the unreserved position must be reported. Disclosure on Schedule UTP makes disclosure on a Form 8275 or 8275-R unnecessary.

The LB&I Directive

The September 25, 2010, LB&I directive regarding Schedule UTP describes IRS’s planned use of Schedule UTP. A centralized processing unit will decide whether schedules are complete; identify issues and returns for examination; and identify trends and areas meriting guidance, with a view to consistent treatment of taxpayers and adoption of correct legal positions.

The directive reminds examiners that uncertainty around ambiguous law may cause reporting on a Schedule UTP, and that a return need not necessarily be examined or adjusted. The proper use of the Schedule UTP by examiners is to accelerate consideration of issues and discussion with taxpayers. Discussions with taxpayers should occur before IDRs are issued. The directive refers to the Quality Examination Planning process introduced in June 2010 as a tool available to examiners.  

The IRS’s Expanded Policy of Restraint

Announcement 2010-76 reports an expansion of the IRS’s “policy of restraint” in requesting tax documents provided by a taxpayer to independent auditors. The IRS will not treat the disclosure of a document that is otherwise protected by the attorney-client privilege, the work product doctrine, or the tax-advisor privilege under IRC section 7525 to the taxpayer’s independent auditor for purposes of auditing the taxpayer’s financial statement as a waiver of any applicable privilege.7 If, however, the privilege is already waived (and thus not “otherwise protected”) or if certain “unusual circumstances” exist, or if a taxpayer has claimed the benefits of a listed transaction, then the IRS reserves the right to request tax accrual workpapers.

Where tax reconciliation workpapers are sought and produced, redactions may be made for: working drafts, revisions, and comments concerning the concise description of the tax position reported on Schedule UTP; the amount of any reserve for a tax position reported on Schedule UTP; or computations determining the rankings in preparing Schedule UTP.

By expanding its policy of restraint, the Service emphasizes that it does not create or imply the application of the attorney-client privilege, the tax advice privilege under section 7525, or the work product doctrine to any document of any taxpayer or third party.

Additional Observations

Neither CIC nor CAP Program taxpayers are forgiven from filing Schedule UTP; however, permanent CAP guidance will set forth rules for those taxpayers.

While the IRS has for now determined that the administrative burden of reporting positions based on its administrative practice outweighs the benefits and accordingly will not be required, it will continue to explore ways to assess their impact. Thus, the exemption may be only a reprieve.

Concerning immaterial reserves or positions for which no reserves are reported (because the taxpayer would litigate), the IRS reiterated that reserves on Schedule UTP should parallel those reported for financial statement purposes or positions not reported because the taxpayer would litigate the issue.

The Service is establishing a working group to study Schedule M-3 and duplicate reporting and the CAP program, which will be made permanent.

The effect of interest and penalties on the tax reserves reported on Schedule UTP is unclear. If interest and penalties are included within the reserve for the position, then the size of those reserves (and possibly their ranking) will increase over time giving a potentially misleading appearance of a growing tax liability. If, however, interest is excluded from the reserves reported for a UTP, then a corporation that reserves only for interest for temporary tax differences would never report those UTPs, however large the reserve may be.


It took the IRS almost exactly eight months from the surprising announcement of its intention to require the use of Schedule UTP to the issuance of the final Schedule, its Instructions, and related guidance. In the next twelve months or so, the effects will be felt dramatically by the affected corporate taxpayers and their advisors, but the consequences may not be fully understood for years to come.

Whatever differences of opinion may exist on the propriety or the efficacy of Schedule UTP, a review of the released guidance makes it difficult to deny that IRS appears to have thoughtfully considered a range of comments and criticisms in formulating its final version of Schedule UTP and the related Instructions. While IRS commendably addressed many commentators’ concerns, a fundamental tension between transparency and privilege remains (notwithstanding the expansion of the policy of restraint).

Affected corporate taxpayers and their tax advisors should carefully review the final Schedule UTP, its Instructions, and the related guidance. A taxpayer disclosing a position that is expected to be litigated must strive to do so without waiving work product privilege on which the expectation is based. Eliminating the maximum tax adjustment solves certain problems, but the ranking by reserve size may indirectly reveal an evaluation of risk and materiality.