On September 24, 2010, the IRS released the final version of Schedule UTP – the form taxpayers must use to report their uncertain tax positions – and related instructions.

As anticipated, Schedule UTP is effective for 2010 tax years. Not as anticipated, the IRS is phasing in the reporting requirement. For 2010, only corporations with assets in excess of $100 million are required to file Schedule UTP. The threshold decreases to $50 million starting with 2012 tax years and to $10 million starting with 2014 tax years.

There are several other changes from the original proposal:

• Corporations are NOT required to report uncertain tax positions for which no reserve has been recorded as a result of IRS administrative practices. In other words, a corporation may take a tax position that is not technically correct but for which the IRS has established an administrative practice of not challenging upon examination. Corporations are not required to disclose such tax positions on Schedule UTP.
• Corporations are NOT required to report the maximum tax adjustment for each disclosed uncertain tax position. Instead, each tax position is ranked based on the amount of the reserve (including interest and penalties) recorded in the financial statements. Expectation-to-litigate positions may be assigned any ranking number.
• If the reserve for an uncertain tax position is greater than or equal to 10% of the total reserve, (not including expectation-to-litigate positions) that tax position must be designated a “major tax position.”
• The instructions expressly state that there is no requirement to disclose the rationale and nature of the uncertainty. However, Schedule UTP still requires a concise description of the tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the IRS of the identity of the tax position and the nature of the issue. Including a statement that a concise description is “Available upon Request” is not an adequate description.

In anticipation of a future possible IRS Examination, many taxpayers will ask “should our company make an aggressive or higher claim than what is proper?” Many think that when the IRS examines the claim, they will decrease the refund or increase the tax, regardless of the situation, in order to complete the audit. Because of this, taxpayers are tempted to claim high so when the decrease comes, the end result works out to be close to the original, correct amount. This “aggressive” thinking is especially tempting in more subjective or contested areas such as the R&D or Research Credit.

I can understand taxpayer’s desire or intent. However, if the IRS identifies something claimed that is wrong or frivolous they may think that other items are wrong or overly aggressive causing them to dig deeper. The result may be an increase in the tax amount and penalties and interest could be assessed as well.

The right answer is to file for every deduction or credit (including the R&D Credit) to the fullest extent possible that is lawful, correct, or right – and no more. That’s exactly what the IRS should be looking for during their audit process. Not an arbitrary reduction in claim in order to close an audit.

Proposed regulations (NPRM REG-153340-09) eliminate the rules for making federal tax deposits by paper coupons for businesses of any kind that make payments to the IRS. Instead, most taxpayers or taxpaying businesses will use the Electronic Federal Tax Payment System (EFTPS). The paper coupon system will be abandoned. The final regulations could be expected to apply to remittances made no earlier than January 1, 2011.

The proposed rules requiring electronic deposits would apply to federal deposits of: employment taxes, corporate income and corporate estimated taxes, unrelated business income taxes paid by tax-exempt organizations, private foundation excise taxes, as well as taxes withheld on nonresident aliens and foreign corporations, estimated taxes on certain trusts, railroad retirement taxes, non-payroll taxes, FUTA taxes, and excise taxes reported on Form 720, Quarterly Federal Excise Tax Return.

The proposed rules would maintain the existing de minimus rule that allows employers with a deposit liability of less than $2,500 for a return period to remit their employment taxes with their quarterly or annual return.

The proposed regulations remove references to “banking days,” providing that if a federal tax deposit would otherwise be due on a Saturday, Sunday or legal holiday, the taxes will be treated as timely deposited if deposited on the next day that is not a Saturday, Sunday or legal holiday.
The proposed regulations provide that tax deposits can be made online or by telephone, 24 hours a day, seven days a week.

CCH News, Federal Tax Day – Current,I.8IRS Proposes Regulations Generally Eliminating Paper Coupon Federal Tax Deposits (IR-2010-92; NPRM REG-153340-09), (Aug. 20, 2010)