Sunday, January 31, 2010

IRS Proposes Increased Disclosure Of Uncertain Tax Positions

On Jan. 26, 2010 the IRS released Announcement 2010-9, described by IRS Commissioner Doug Shulman in remarks at a conference last week as, "a major step towards transparency ... related to changes we are proposing to reporting requirements regarding business taxpayers’ uncertain tax positions."

Included among the proposed new disclosures to the IRS would be the "maximum amount of U.S. income tax exposure if the taxpayer's position is not sustained." The IRS seeks comment by March 29, 2010 as noted in the Announcement.

In his remarks at the New York State Bar Association, Shulman explained the impetus for the proposal:

Today, we spend up to 25 percent of our time in a large corporate audit searching for issues rather than having a straightforward discussion with the taxpayer about the issues. It would add efficiency to the process if we had access to more complete information earlier in the process regarding the nature and materiality of a taxpayer’s uncertain tax positions. The goals of our proposal are simple: to cut down the time it takes to find issues and complete an audit… ensure that both the IRS and taxpayer spend time discussing the law as it applies to their facts, rather than looking for information…and to help us prioritize selection of issues and taxpayers for examination.

Maximum Tax Exposure, 'Concise Description' Would Be Required
Shulman outlined some of the major provisions of Announcement 2010-9, as they would impact business taxpayers (remarks reformatted to outline form below):

  1. Reporting uncertain tax positions would be required at the time a return is filed by certain business taxpayers: those who have both: [1] a financial statement prepared under FIN 48 or other similar accounting standards reflecting uncertain tax positions and [2] assets over $10 million.
  2. Under the Announcement, these taxpayers would be required to annually disclose uncertain tax positions in the form of a [1] concise description of those positions and [2] the maximum amount of US income tax exposure if the taxpayer’s position is not sustained.
  3. By concise, we mean a few sentences that inform us of the nature of the issue, and not pages of factual description or legal analysis... We will be looking only for a brief description of the issue and the maximum amount of US income tax exposure. The proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts.
  4. We are asking for a list of issues that the taxpayer has already prepared for financial reporting purposes, in order to improve the efficiency and effectiveness of tax examinations.
  5. We are also looking for the maximum exposure, so we can allocate our exam resources appropriately. We need to have a sense of materiality and whether we should spend exam resources on an issue.

Regarding the potential burden on taxpayers from these new requirements, Shulman noted the IRS' view as follows:

We do not believe we will be adding substantial new work or burden on taxpayers. These taxpayers are already required to establish tax reserves for uncertain tax positions in determining their financial statement income under US or foreign accounting standards, such as FIN 48. So the work is alreadybeing done. We are asking for more transparency.

Just to be clear again, this proposal would not require that taxpayers disclose how strong or weak they regard their tax positions or report to us the amounts they reserved on the books regarding those positions.

FEI Office Of Government Affairs, Committees Will Review
Matt Miller, senior director, Government Affairs, in FEI's Washington D.C. office was quoted in USA Today on January 27 in, "IRS Wants Companies to Disclose Debatable Deductions," by Kevin McCoy. Here is what Miller said, as excerpted from the article:

"This puts the audit relationship" with the IRS "in a more confrontational mode," said Matt Miller of Financial Executives International, a 15,000-member group of senior tax officials, CFOs, treasurers and controllers. "It involves the disclosure of exposure items to possible adversaries."

Additionally, Miller explains to us:

FEI supports transparency and other efforts by the Government to improve compliance. However, it is always important to review the appropriate balance between the competing priorities of securities law and federal tax administration, as well as other public policy considerations. This IRS announcement appears to go beyond transparency – it involves disclosure of exposure items to possible adversaries – the mere fact of identifying issues that are uncertain is significant.

FEI's Office of Government Affairs, FEI's Committee on Taxation, and other committees will be studying the IRS' proposal and will consider filing a comment letter(s) on the proposed new disclosures.

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Anonymous said...

Makes sense. The IRS has finally figured out that FIN48 has created a scenario where large amounts of reserves are released when the IRS audits are complete. Since the disclosure is weak, all the IRS reads is that reserves were released, and it makes them feel foolish. The real problem is FIN 48 creates an embedded bias of undue conservatism (the booked reserves) that are described in vague terms in the footnotes. Life prior to FIN48 yielded tac accounting that was much more balanced. Like many of the FASB's so-called improvements, this is another example of what goes wrong.

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JoeMastrianoCPA said...

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To anyone having tax problems, I recommend you visit and read up on all the advice available there, it will help you better understand the depth of the situation you are in, and point out what the available options are. You should also check out the section about selecting tax advisors which details a couple of good things you should do before hiring someone in order to protect yourself from scams.