With the release of Announcement 2010-30, the IRS made it pretty clear they’re serious about requiring certain corporations to include in their tax returns a schedule reporting all their uncertain tax positions (“UTPs”). The announcement included Instructions to the Schedule UTP and a draft Schedule UTP, which is required to be filed beginning with the 2010 tax year (i.e. 2011 filing season). This week, and in weeks ahead, I’ll be discussing some of the nuances of this initiative and what it means for corporate taxpayers.
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.
