IRS Releases Final Schedule UTP

On September 24th, the IRS released significant changes related to its plan to require certain business taxpayers to report uncertain tax positions (UTP) on their tax returns.

Schedule UTP is required for corporations that issue audited financial statements for the applicable tax year. The IRS has revised the definition of audited financial statements as a statement in which an independent auditor expresses an opinion, thus compiled or reviewed financial statements are excluded.

Many of these changes come in response to comments received on the previously issued draft forms where commentators expressed concerns that the reporting requirements would create a large burden on affected corporations.
The IRS made four significant changes in response to the comments:

1. A five-year phase-in of the reporting requirements that is based on the corporation’s asset size
2. The maximum tax adjustment is not required to be reported
3. Administrative practice tax positions are not required to be reported
4. The rationale and nature of uncertainty is not required to be reported in the concise description of the position

Five-year phase-in
The draft Schedule UTP required reporting beginning with the 2010 tax year by corporations with assets equal to or greater than $10 million. The finalized Schedule UTP introduced a five-year phase-in of the reporting requirements. Corporations with total assets of $100 million or more are required to file Schedule UTP beginning with the 2010 tax years. The total asset threshold is reduced to $50 million for the 2012 tax year and $10 million for the 2014 tax year. The IRS will consider whether to extend the reporting requirements to pass-through entities and tax-exempt organizations for 2011 or future tax years.

Maximum tax adjustment
The draft Schedule UTP required the corporation to report a maximum tax adjustment for each tax position reported. Due to the strong commentary received, the IRS removed this requirement and instead will require corporations to rank their reported tax positions based on the federal income tax reserve (including interest and penalties) recorded for the position taken in the return. The IRS anticipates the ranking method will allow it to more accurately evaluate the materiality of the reported issues and will impose a smaller burden on corporations.

Administrative practice
The draft Schedule UTP required corporations to report tax positions for which the corporation did not record a reserve due to the fact that the IRS typically does not raise the issue during an examination (IRS administrative practice). Many commentators felt this requirement would create a burden on corporations while not providing the IRS with useful information. The IRS agreed with these concerns and eliminated the requirement.

Rationale and nature of uncertainty
Corporations are also not required to report tax positions that are deemed immaterial under the applicable financial reporting standards. However, corporations are still required to report tax positions for which no reserve has been recorded based on the corporation’s expectation to litigate, although guidance on how to document this position was not provided in the final instructions.

Contact us
The IRS has stated it will continue to consider the concerns raised over Schedule UTP and how best to provide further guidance to impacted corporations. Please contact your Elliott Davis tax advisor if you have questions or would like more information.

This publication is for informational purposes and does not contain or convey tax advice. The information should not be used or relied upon in regard to any particular situation or circumstances without first consulting a tax advisor.