In IRS Announc. 2010-9, 2010-7 IRB 408 (the “UTP Announcement”), the IRS announced that it was considering the adoption of an important addition to the income tax reporting requirements of corporations and certain business taxpayers. The new schedule would require certain business taxpayers to disclose annually uncertain tax positions (UTPs) by concisely describing the positions and providing information about their magnitude. Initially, the new schedule was to be filed beginning in tax years ending in 2010 by business taxpayers with total assets in excess of $10 million, provided the taxpayer had one or more uncertain tax positions of the type required to be reported on the new schedule. Eventually, however, the IRS decided to move forward with the UTP schedule and “softened” somewhat its initial approach on the asset threshold of $10 million, starting with a $100,000,000 gross asset value threshold in 2010, which greatly reduced the number of required uncertain tax position schedules filing on 2010 returns. Now there is a phase of the asset threshold amount for corporations and certain business taxpayers until 2014 when the excess of $10 amount triggers the reporting requirement.
It is clear that the IRS is trying to force corporate taxpayers to bring out into the open tax positions taken on their returns with which the IRS may not agree. Previously, taxpayers only were required to disclose uncertain tax positions to avoid accuracy-related penalties, and then only where there was not “substantial authority” or reasonable reliance on a tax advisor's “more likely than not” opinion (except in limited instances). Now, the IRS may take the view that a tax position having a significant degree of uncertainty must be disclosed and identified on the corporate tax return. This will inevitably lead to further litigation concerning the ability of the IRS to obtain workpapers, memoranda, legal opinions, and work product that are used to support the preparation and filing of Schedule UTP.
Various professional groups argued last Summer that the proposed Schedule UTP should be withdrawn as it forces taxpayers to either identify potential tax liability to fulfill its self-assessment requirements or face the possibility of a punishing rebuke should it fail to satisfy the IRS's increasing need for information. This obligation to disclose questionable or uncertain tax positions runs counter to time honored traditions between attorney-client communications, the work product doctrine as well as the relatively new federal tax practitioner privilege under section 7525 of the Internal Revenue Code.
While interim notices on the uncertain tax position schedule provided a limited form of mitigation, the present UTP form provides a roadmap for the IRS to efficiently audit a subject taxpayer by zeroing in on the taxpayer’s own concerns of what positions may be successfully challenged by the Service. What happens when a taxpayer omits a item which the Service thought should have been disclosed as “uncertain”? Will penalties be imposed? Unless Congress acts, or a strong lobbying effort by professional groups ultimately is successful, it will be up to the courts to decide if the new burden of disclosing UTP is valid, even if promulgated under final regulations.
For further discussion on the background and implications of this new administrative rule, see August, “The Uncertain State of Uncertain Tax Positions”, Business Entities (WG&L), May/June 2011.