A controversial accounting pronouncement, Financial Interpretation 48 (FIN 48) requires businesses to prepare an analysis and possibly record a liability in their financial statements for “uncertain tax positions.” At the time it was passed, many professionals thought it would not be long before the IRS would use this as an audit road map.
In a recent announcement (Announcement 2010-9), the Internal Revenue Service expressed their intent to change the amount of required disclosure that certain businesses must make regarding “uncertain tax positions”. They cite improved tax compliance and administration as the reason for the change.
The IRS is currently developing a new schedule for taxpayers to report the uncertain tax positions determined through FIN 48 on their federal tax returns. The schedule will require a business taxpayer or related entity to describe uncertain tax positions for which they have recorded a potential liability on their financial statements. It goes further to require disclosure of positions for which the company has not established a reserve due to an expectation to litigate the position or a determination that the IRS has a general practice not to examine the position. In addition, the schedule would require the disclosure of the maximum amount of potential federal tax liability attributable to each uncertain tax position.
In his comments to the New York State Bar Association, IRS Commissioner Doug Shulman cited that the required disclosure would make corporate audits more efficient. “Today, we spend up to 25% of our time in a large corporate audit searching for issues rather than having a straightforward discussion with the taxpayer about the issues,” said Shulman.
Currently, the IRS intends to limit this requirement to business taxpayers with total assets in excess of $10 million. Also in consideration are penalties or other sanctions for failure to file the schedule or provide satisfactory disclosure.
The surprise announcement has raised concerns and confusion among business community and professional tax preparers. Many tax preparers and other commentators believe that the proposed disclosures will cause an undue burden and additional costs to honest taxpayers. The question primarily revolve around “what is uncertain?” How this question is interpreted by the IRS is of significant concern and could certainly be the beginning to a very slippery slope.
The IRS seeks comments on the proposal described in the Announcement, which must be filed by March 29, 2010. They can be mailed to Internal Revenue Service, CC:PA:LPD:PR (Announcement 2010-9), Room 5203, P.O. Box 7604, Ben Franklin Station, N.W., Washington, DC 20044, or e-mailed to Announcement.Comments@irscounsel.treas.gov, with a subject line that reads “Announcement 2010-9.”
