The Internal Revenue Service blinked. The agency has retreatedfrom some of the most worrisome and time-consuming provisions ofits proposed requirement that companies report their uncertain taxpositions with a new Form UTP. However, once the wording of theinstructions for the new form is finalized, accountants and taxattorneys at companies with more than $100 million in assets willhave to start preparing the new form, which will apply to thecurrent tax year.

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

Shulman said the agency is dropping a requirement that companiesassign a dollar value to each uncertain tax position. Companieswill only be required to rank those positions, with no valueassigned. And smaller companies will have more time to prepare forthe requirement: those with $50 million or more in assets mustcomply in the 2012 tax year, and those with $10 million or morehave until 2014.

Critics had a mixed response to the new IRS position, althoughthings could have been a lot worse. The IRS, initially seekinginformation to help it identify issues to audit, planned to applythe new reporting requirement immediately to all companies withassets of more than $10 million. And in the wake of the decision bythe U.S. Supreme Court not to hear an appeal in the case ofU.S. v. Textron, the IRS was looking to require detailedinformation about those taxpayers' assessments of their potentialliability for all uncertain tax positions.

The tax agency received a blizzard of complaints from corporatetax attorneys, most of whom argued that the new Form UTP would deala body blow to the accrual work-paper privilege and toattorney-client privilege, while requiring companies to provideestimates for some uncertain tax positions that would be purelyartificial, with no real bearing on their actual risk.

“They backed down, which is kind of surprising,” says DougStransky, a partner at Sullivan & Worcester in Boston. “I'm notsure you can say they solved the problem, though. The proof will behow they write the instructions for Form UTP, and in how they applythat policy of restraint in their audits. It is just a policy, nota law.”

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

Dicker says the key outstanding issues are “what the finalinstructions look like,” and the question of “how IRS auditors willactually use the info they get from the form, and how they foldthat into their audit process.”