IRS Releases Final Form 1120 Schedule UTP and Modifies Some Requirements

In Announcement 2010-75 The IRS has issued the final Form 1120 Schedule UTP and related instructions for tax year 2010. In issuing the final version of the form, the IRS also made modifications from the original proposal that affects which entities will be required to file the return and the types of items that will be reported.

Corporations that file Forms 1120, 1120-F, 1120-L or 1120-PC and issue or are included in audited financial statements that have total assets exceeding $100 million must file the schedule for their 2010 tax year. The total asset threshold will be reduced over five years to include a larger number of corporations. The threshold for filing will drop to entities with total assets of more than $50 million for 2012 tax years, and down to total assets of $10 million for tax years beginning in 2014. The IRS indicated that it will consider whether to extend these requirements to other taxpayers, such as passthrough entities and tax exempt organizations, for 2011 and later years.

The final schedule dropped the requirement that taxpayers report the maximum tax adjustment for each tax position listed on the schedule. Rather, taxpayers will required to rank the positions in order based on the United States federal income tax reserve, including interest and penalties, recorded for each position on the return. The taxpayer must also specifically identify those tax positions for which the reserve exceeds 10% of the aggregate amount of reserves.

The final version of the schedule no longer includes the requirement that a taxpayer must disclose the rationale and nature of the uncertainty, replacing that with a requirement that the taxpayer include a concise description of the tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the Service of the identity of the tax position and the nature of the issue.

The IRS has also eliminated the requirement that taxpayers report tax positions for which no reserve was created due to a widely-understood administrative practice, but indicated they would “continue to explore” ways to determine the impact of such positions on overall tax compliance.

The IRS clarified the instructions to indicate that the schedule looks for reporting of tax positions consistent with the reserve decisions made by the entity for purposes of the audited financial statements. As well, the unit of account for purposes of the form should be applied consistent with the treatment in FIN 48. If a corporation uses IFRS or another comprehensive basis of accounting other than GAAP for financial reporting must identify a unit of account based on FIN 48 or any other level of detail that is consistently applied if that identification is “reasonably expected to apprise the Service of the identity and nature of the issue underlying a tax position taken in the tax return.”

A number of other clarifications were made to the instructions based on the comments received. The instructions were clarified to make clear that Schedule UTP requires the reporting of U.S. income tax positions, but not foreign or state tax positions. As well, a UTP must be filed once 1) a reserve for a tax position is recorded and 2) a tax position is taken on the return, regardless of the order of those two events. As well, a corporation reports only its own tax positions and not those of a related party.

Taxpayers also will not be required to report on tax positions taken in years before 2010 even if a reserve is recorded in audited statements issued for 2010 or later years. The form is not required to be attached to returns for short tax years ended in 2010. As well, worldwide assets is used to determine if a corporation meets the filing requirements.

The instructions define an audited financial statement as “one on which an independent auditor expresses an opinion” and specifically excludes audited or compiled statements. The definition of a reserve was clarified to indicate that it includes a reserve for United States federal income taxes, interest and penalties, and that differences that are temporary must still be reported on Schedule UTP.

If a corporation’s information is included in multiple financial statements, the existence of a reserve in any of those audited financial statements that relates to a position of the taxpayer triggers the requirement to file the Schedule UTP.

The IRS did not adopt suggestions that taxpayers not be required to report positions for which no reserve was recorded because the taxpayer expects to litigate the position, litigation for which the taxpayer expects to prevail. No guidance is provided on how to determine such “expected to litigate” positions except to indicate that it “expects that a corporation would continue to document its decision in the same way as it substantiates any decision not to record a reserve in its financial statements.”

The IRS also provided that disclosure of a position for other than a reportable transaction on Schedule UTP will be considered a disclosed position for the purposes of the penalty under §6662(i) for undisclosed positions lacking economic substance. As well, complete and adequate disclosure of a position on the Schedule UTP will be treated as if the corporation had filed a Form 8275 or 8275-R for the position in question. For the moment such disclosure will not satisfy the requirement to file Form 8886 for listed and reportable transactions, but the IRS is studying whether it may be possible to eliminate this filing as well for disclosed positions.

Along with the announcement for the final Schedule UTP, the IRS released Announcement 2010-76 that modified the IRS’s “policy of restraint” of seeking documents in certain situations. The revised procedure provides that generally the IRS will not seek to assert that disclosure to the outside auditor of items authorized subject to privilege amounts to a waiver of the privilege unless the taxpayer has engaged in other activities that would waive the privilege or it relates to a listed transaction for which a request is made under IRM 4.10.20.3.

As well taxpayers may redact from any tax reconciliation workpapers related the preparation of Schedule UTP requested by the IRS during exam that are “(a) working drafts, revisions, or comments concerning the concise description of tax positions reported on Schedule UTP; 3 (b) the amount of any reserve related to a tax position reported on Schedule UTP; and (c) computations determining the ranking of tax positions to be reported on Schedule UTP or the designation of a tax position as a Major Tax Position.” The revisions in the notice are to be incorporated in IRM 4.10.20.

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