The New Jersey Division of Taxation recently added federal Schedule UTP (Uncertain Tax Position) to the list of federal income tax forms and schedules that must be included as part of a full and complete New Jersey Corporation Business Tax (“CBT”) Return if a Schedule UTP was included with the Federal 1120. It added Schedule UTP notwithstanding that: the U.S. government doubts its usefulness for IRS audits, the Schedule UTP disclosure of relevant IRS statutes do not directly translate to New Jersey state income taxes, and prior New Jersey administrations concluded that the information in Schedule UTP was not sufficiently related to New Jersey tax administration to be of substantial use.
What is it? Not a useful document, so says the U.S. Treasury Department Inspector General for Tax Administration (“TIGTA”). Treasury Inspector General for Tax Administration, The Uncertain Tax Position Statement Does Not Contain Sufficient Information to Be Useful in Compliance Efforts (Mar. 23, 2018). TIGTA explained that Form 1120’s Schedule UTP evolved following the Sarbanes-Oxley Act of 2002 and the development of Financial Accounting Standards Board Interpretation No. 48 (now, think of Accounting Standards Codification “ASC” 740). The Schedule UTP disclosures include the primary Internal Revenue Code sections and subsections, timing (whether permanent or temporary), a pass-through entity’s employer identification number if relevant, whether the tax position is “major” (10 percent or more of all uncertain tax positions for the current and prior tax years), a ranking of the relative size of the position, and a description of the position that “should not exceed a few sentences.” Id. at 1. In the words of the then IRS Commissioner in 2010 when Schedule UTP started, it was “a game changer” that would have IRS auditors spend less time “identifying issues” and spend more time “on appropriate issues.” Id. at 6-7.
Was it useful? No, so says TIGTA. After analyzing Schedule UTP, TIGTA concluded in 2018 that “Schedule UTP does not … allow the IRS to achieve the original goals of its use.” Id. at 6. TIGTA discovered that the items on Schedule UTP “simply provide a validation of issues that would otherwise be identified during the normal course of the examination process or in reviewing other parts of a corporation’s tax return.” Id. at 9. If the IRS cannot make good use of the Schedule UTP it is nonsensical that New Jersey could make use of it.
In the early days of federal Schedule UTP, the New Jersey Division of Taxation considered requiring inclusion of the federal Schedule UTP with CBT returns. After much thoughtful discussion internally and externally, the idea was dropped. Hopefully, New Jersey will remove the requirement to include Schedule UTP with the New Jersey CBT return if Schedule UTP was included with the Federal 1120, even if just as a measure of compliance simplicity.