• Announcement 2010-9: IRS Intends to Require Disclosure of Uncertain Tax Positions by Business Taxpayers
  • February 8, 2010 | Authors: Robert A. Friedman; William "Wes" E. Sheumaker
  • Law Firms: Troutman Sanders LLP - New York Office; Troutman Sanders LLP - Atlanta Office
  • On January 26, 2010, in Announcement 2010-9 (the “Announcement”), the IRS announced its intention to require certain business taxpayers to disclose “uncertain tax positions” on their federal income tax returns. Specifically, corporations and other business taxpayers with total assets in excess of $10 million and subject to FASB Interpretation No. 48 (“Fin 48”) or other accounting standards relating to uncertain tax positions would be required to file a schedule providing information about their uncertain tax positions. Notably, the Announcement follows the recent filing of a petition for certiorari in U.S. v. Textron Inc. pursuant to which the taxpayer requested that the United States Supreme Court review the First Circuit Court of Appeals’ holding that the attorney work-product doctrine does not shield tax accrual workpapers from disclosure. For more information, see our August 28, 2009 Advisory on this topic.

    The IRS proposal (as described in greater detail below) may have significant adverse impact on you and your business. Our tax experts are available to assist you in better understanding the proposal and in drafting comments to it, as requested by the IRS.  Additionally, you may wish to lobby Congress to prevent the IRS from adopting the proposal in its present form. Troutman Sanders Strategies is a full-service government relations and issue management firm which advocates our clients’ public policy issues through a broad array of contacts at the federal, state and local levels.

    Contents of Proposed Schedule

    The schedule described in the Announcement would require taxpayers to provide a concise description of each uncertain tax position for which the taxpayer (or a related entity) has recorded a reserve in its financial statements and the maximum amount of potential federal income tax liability attributable to each position. In addition, taxpayers would be required to disclose any position related to the determination of any United States federal income tax liability for which a taxpayer (or a related entity) has not recorded a tax reserve because (i) the taxpayer expects to litigate the position, or (ii) the taxpayer has determined that the IRS has a general administrative practice not to examine the position. 

    The description of each uncertain tax position would need to contain sufficient detail so that the IRS could determine the nature of the issue. Furthermore, the IRS contemplates that the description would include the rationale for the position and a concise general statement of the reasons for determining that the position is an uncertain tax position. To be sufficient, the description would need to contain:

    (1) The Internal Revenue Code Sections implicated by the position;

    (2) A description of the taxable year or years to which the position relates;

    (3) A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;

    (4) A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;

    (5) A statement whether the position involves a determination of the value of any property or right; and

    (6) A statement whether the position involves a computation of basis.

    In addition, the schedule would require a taxpayer to specify for each uncertain tax position the entire amount of United States federal income tax that would be due if the position were disallowed in its entirety in an IRS examination.  This amount would include the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction, or credit if the position were not sustained.

    Formal Guidance; Sanctions

    The IRS anticipates publishing a notice of proposed rulemaking that certain businesses required to a make a return will be required to file a form or schedule relating to the disclosure of uncertain tax positions as part of its return in accordance with the forms, instructions or other appropriate guidance by the IRS.  Furthermore, the IRS is evaluating additional options for penalties or sanctions to be imposed when a taxpayer fails to make adequate disclosure of the required information regarding its uncertain tax positions.  One option being considered by the IRS is to seek legislation imposing a penalty for failure to file the schedule or to make adequate disclosure.
               
    Request for Comments

    The Announcement provides that the IRS intends to publish the new schedule as quickly as possible and mandate that the new schedule be filed with returns filed after the release of the schedule.  Further, the Announcement requests comments on the schedule, which must be filed by March 29, 2010, and specifically requests comments on issues such as (i) whether the scope of the Announcement should be modified regarding the uncertain tax positions for which information is required to be reported (e.g., positions for which no tax reserve has been established because the taxpayer determined the Service has a general administrative practice not to examine the position) and (ii) whether the list of information proposed to be included should be modified, including whether certain information should be requested in some circumstances upon audit rather than with tax return.