On January 26, 2010, the Internal Revenue Service issued Announcement 2010-9, Uncertain Tax Positions – Policy of Restraint. On this same day IRS Commissioner Doug Shulman addressed the New York State Bar Association Taxation Section Annual Meeting in New York City and spoke about the concept of “transparency.”
 
The announcement discusses the IRS plan to develop a new schedule that would require Form 1120 filers to report uncertain tax positions on their tax returns, beginning with the 2010 tax year. Under the proposal reporting of uncertain tax positions would be required for corporations that have both a financial statement prepared under FIN 48 or similar accounting standards (presumably IFRS) reflecting uncertain tax positions and assets over $10 million. The $10 million asset threshold is used to place taxpayers in the IRS Large and Mid-Size Business (LMSB) division, and is also the basis for corporations being required to file Schedule M-3 and to electronically file their Federal income tax return if they also issue 250 or more documents including W-2 and 1099 forms.
 
Under the Announcement, C corporations would be required to annually disclose uncertain tax positions in the form of a concise description of those positions and the maximum amount of US income tax exposure if the taxpayer’s position is not sustained. The commissioner stated that by concise, they mean a few sentences that would inform the IRS of the nature of the issue as opposed to pages of factual description or legal analysis. The Commissioner made the following remarks, which are posted on the IRS web site:

“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.

"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. 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. 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.

"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 already being 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."

The Service announced that it intends to publish the new schedule as quickly as possible and will be inviting the public to submit comments to the IRS National Office on the proposal through March 29, 2010. We will continue to monitor this area as developments take place.

For more information on this and other tax issues, please contact Neil Gerard, CPA, or Joel Boff, CPA, or your J.H. Cohn service professional, at 877-704-3500. 
 
Neil Gerard, CPA, is a J.H. Cohn tax partner. He can be reached via email or at 973-403-7995. 
 
Joel Boff, CPA, is a J.H. Cohn tax partner and the Firm's New York Office Tax Practice Director. He can be reached via email or at 646-254-7490.

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