Regs on Uncertain Tax Positions Clarified

The Internal Revenue Service blinked. The agency has retreated from some of the most worrisome and time-consuming provisions of its proposed requirement that companies report their uncertain tax positions with a new Form UTP. However, once the wording of the instructions for the new form is finalized, accountants and tax attorneys at companies with more than $100 million in assets will have to start preparing the new form, which will apply to the current tax year.

IRS Commissioner Douglas Shulman promised that his agency's long-standing "policy of restraint" would apply to the new measure, in terms of agency auditors using the new UTP form as a guide to which areas to audit.

Shulman said the agency is dropping a requirement that companies assign a dollar value to each uncertain tax position. Companies will only be required to rank those positions, with no value assigned. And smaller companies will have more time to prepare for the requirement: those with $50 million or more in assets must comply in the 2012 tax year, and those with $10 million or more have until 2014.

Critics had a mixed response to the new IRS position, although things could have been a lot worse. The IRS, initially seeking information to help it identify issues to audit, planned to apply the new reporting requirement immediately to all companies with assets of more than $10 million. And in the wake of the decision by the U.S. Supreme Court not to hear an appeal in the case of U.S. v. Textron, the IRS was looking to require detailed information about those taxpayers' assessments of their potential liability for all uncertain tax positions.

The tax agency received a blizzard of complaints from corporate tax attorneys, most of whom argued that the new Form UTP would deal a body blow to the accrual work-paper privilege and to attorney-client privilege, while requiring companies to provide estimates for some uncertain tax positions that would be purely artificial, with no real bearing on their actual risk.

"They backed down, which is kind of surprising," says Doug Stransky, a partner at Sullivan & Worcester in Boston. "I'm not sure you can say they solved the problem, though. The proof will be how they write the instructions for Form UTP, and in how they apply that policy of restraint in their audits. It is just a policy, not a law."

Eli Dicker, chief tax counsel at the Tax Executives Institute, says, "I think the IRS is to be credited for listening to the comments, including ours, about the scope of their original form. But issues remain."

Dicker says the key outstanding issues are "what the final instructions look like," and the question of "how IRS auditors will actually use the info they get from the form, and how they fold that into their audit process."


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