First who needs to be concerned? Broadly, corporations with assets in excess of $10 million, who file a Form 1120, issue audited financial statements and record a UTP in those financial statements will be required to file Schedule UTP. Pass-through entities and tax-exempt organizations are not required to file Schedule UTP for 2010 tax years.

I was talking to a CFO of a multinational company last week, telling him about the Schedule UTP. He made the comment that perhaps he would just switch to IFRS and not have to deal with this because his financials were not filed in accordance with U.S. GAAP. That’s not an option. The IRS thought of that. It doesn’t matter under which accounting standards the audited financials are issued; the Schedule UTP instructions refer to U.S. GAAP, IFRS or any other country-specific accounting standards. What he may have been thinking, and here he would have a valid point, is that a UTP required to be recorded under U.S. GAAP is not necessarily required to be recorded under IFRS. And generally, if it’s not recorded in the financial statements, it’s not reportable on Schedule UTP. That particular fact pattern, however, is rare.

Likewise, the IRS contemplated that U.S. corporations might try to circumvent the reporting requirement by having a foreign parent record the UTP as a top-side adjustment. The instructions specifically require the reporting of a corporation’s tax positions for which the corporation or a related party has recorded a reserve in an audited financial statement.

Corporation A is a corporation filing Form 1120 with $20 million of assets.  Corporation B is a foreign corporation not doing business in the United States and is a related party of Corporation A.  Corporations A and B issue their own audited financial statements.  If Corporation A has taken a tax position in a tax return, but does not record a reserve with respect to that tax position in its own audited financial statements, that tax position must be reported by Corporation A on its Schedule UTP if the audited financial statements of Corporation B include a reserve with respect to that tax position. Schedule UTP Instructions

I’ll finish with a piece of good news. Schedule UTP is not retroactive. A corporation is not required to report a tax position taken in a tax year beginning before December 15, 2009, or beginning on or after December 15, 2009 and ending before January 1, 2010.

• Ordinary pretax book income does not include significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect.  Such items include, but are not limited to, discontinued operations or the cumulative effect of a change in accounting principle. 
• Certain items are not included in the estimated annual effective tax rate.  Instead, these items are allocated 100% to the quarter in which they occur.  Such items include, but are not limited to, certain releases of a valuation allowance, certain changes in a liability for uncertain tax positions, the impact of a change in tax law and the true-up of the tax provision from the prior year.
• Just like the annual tax provision, the interim tax provision is based on enacted tax law.  As of June 30, 2010, the American Jobs and Closing Tax Loopholes Act of 2010 (a.k.a. the Extenders Bill) has not been signed into law by the President.   As such, it is not appropriate to include in the second quarter provision any benefit for Research Credits generated during 2010.   
• Jurisdictions in which a company is unable to recognize a tax benefit for losses (i.e. a full valuation allowance has been recorded) are excluded from the estimated annual effective income tax rate calculation. 

According to the announcement, the required disclosures will include the following:

• The Internal Revenue Code sections potentially implicated by the position;
• A description of the taxable year or years to which the position relates;
• A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
• A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
• A statement whether the position involves a determination of the value of any property or right;
• A statement whether the position involves a computation of basis;
• The entire amount of United States federal income tax that would be due if the position were disallowed in its entirety on audit. This amount is the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction, or credit if the position is not sustained.

Uncertain tax positions will also include any position for which a taxpayer or related party has not recorded a tax reserve because:
1. the taxpayer expects to litigate the position, or
2. the taxpayer has determined that the Service has a general administrative practice not to examine the position.

The IRS intends that the new schedule will be filed by a business taxpayer with total assets in excess of $10 million if the taxpayer has one or more uncertain tax positions of the type required to be reported on the new schedule. This includes a taxpayer who prepares financial statements, or is included in the financial statements of a related entity that prepares financial statements, if that taxpayer or related entity determines its United States federal income tax reserves under FIN 48, or other accounting standards.

The IRS has invited the public to submit comments on the proposal described in this Announcement by March 29, 2010. The Service intends to mandate that the new schedule be filed for uncertain tax positions filed with returns filed after release of the schedule. There has been no indication as to when the schedule will be released.