The Internal Revenue Service has announced that it is proposing to implement reporting requirements regarding uncertain tax positions taken by business taxpayers, in order to improve tax compliance and administration. These reporting requirements will be in the form of a schedule attached to tax returns where these business taxpayers will be required to report uncertain tax positions that they have taken on their tax returns.
This schedule will provide the IRS with a description of those positions and information about their magnitude. The schedule would not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts, although the IRS has asserted that it can already compel the production of this information through a summons.
The IRS noted that existing business tax returns do not currently require that taxpayers identify and explain uncertain tax positions underlying their returns, even though many taxpayers are required by accounting rules to identify and quantify uncertain tax positions taken in a tax return for financial accounting purposes.
The IRS has determined that this information also would aid the IRS in focusing its examination resources on returns that contain specific uncertain tax positions that are of particular interest or of sufficient magnitude to warrant inquiry by the IRS. The information would also allow IRS agents to identify all of the issues underlying the tax returns more quickly and efficiently.
The schedule being developed will be filed with the business tax return of the taxpayer. The schedule will require:
- A concise description of each uncertain tax position for which the taxpayer has recorded a reserve in its financial statements; and
- The maximum amount of potential federal tax liability attributable to each uncertain tax position, determined without regard to the likelihood of prevailing on the merits.
In addition to those positions for which a tax reserve must be established under applicable accounting standards, businesses will also be required to include on the schedule any position for which the business has not recorded a tax reserve because:
- The taxpayer expects to litigate the position, or
- The taxpayer has determined that the IRS has a general administrative practice not to examine the position.
The schedule will require a concise description of each uncertain tax position in sufficient detail so that the IRS can determine the nature of the issue. Although the sufficiency of a description will depend on the taxpayer’s particular facts and the nature of the underlying transaction, at a minimum, the description must contain:
- The Code sections potentially implicated by the position;
- A description of the taxable year or years to which the position relates;
- A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
- A statement that the position involves a permanent inclusion or exclusion, the timing of that item, or both;
- A statement whether the position involves a determination of the value of any property or right;
- A statement whether the position involves a computation of basis; and
- The amount of tax that would be due if the position were disallowed in its entirety on audit.
The IRS intends the new schedule to be filed by a business taxpayer with total assets in excess of $10 million if the taxpayer has one or more uncertain tax positions of the type required to be reported on the new schedule.
Although the IRS has assured taxpayers that this proposal does not change the IRS’s “policy of restraint” with respect to accessing a taxpayer’s tax accrual workpapers, this schedule, if implemented, will represent a dramatic change in the way businesses must report their assessment of their tax positions.
This proposal by the IRS remains just that – a proposal. We anticipate strenuous objections to the proposal from business owners and tax professionals, in particular, and taxpayers in general. If the requirement is not clearly and narrowly defined, the proposed schedule would significantly increase the business taxpayer’s burden of tax compliance.
For more information, please contact Mark Klimek or one of our Tax Practice attorneys.
Mark D. Klimek
Our Tax Practice Group provides a broad range of state and local tax services, including tax planning, tax controversy and tax policy services.