IRS to Require Disclosure of Uncertain Tax Positions on federal income tax returns

In IRS Announcement 2010-9, issued on January 26, 2010, the IRS announced that it intends to begin requiring corporations and other designated business taxpayers with total assets in excess of $10 million to disclose and explain on their federal income tax returns any “uncertain tax positions” they have taken on those returns. Specifically, the IRS intends to require covered business taxpayers to file a schedule with their returns providing information about any uncertain tax positions for which they have booked a financial statement reserve under FASB Interpretation No. 48 (“Fin 48”) or other applicable accounting standards.  The proposed disclosure requirement would apply to both publicly-traded and non-publicly traded corporations and other to-be-designated business entities.  The required disclosure would allow the IRS to more easily identify and challenge material tax positions taken in a covered taxpayer’s returns with respect to which there is sufficient uncertainty to trigger the establishment of a financial statement reserve. Proposed Disclosure Schedule According to IRS Announcement 2010-9, the new tax return schedule would require covered business taxpayers to provide a concise description of each tax position for which the taxpayer or certain affiliates has recorded a reserve in its financial statements and the maximum amount of potential federal income tax liability attributable to each such position (i.e., how much the IRS can collect if it successfully challenges the uncertain tax position). Covered taxpayers also would be required to disclose any position related to the determination of any federal income tax liability for which the taxpayer or an affiliate has not recorded a tax reserve because the taxpayer expects to litigate the position, or the taxpayer the IRS has a practice of not examining the position.  The description of each uncertain tax position would need to contain sufficient detail so that the IRS could determine the precise nature and specifics of the issue. Furthermore, the IRS contemplates that the required description would include the rationale for the position (i.e., the taxpayer’s argument) and a concise general statement of the reasons for determining that the position is an uncertain tax position (i.e., the basis on which IRS could challenge the taxpayer’s position). Future Guidance; Penalties The IRS anticipates publishing proposed regulations in the near future formally mandating the reporting of “uncertain tax positions” in accordance with forms, instructions and other guidance to be published by the IRS.  Taxpayers can also assume that the IRS will ask Congress to enact, or otherwise develop and seek to impose, penalties or other sanctions in cases in which a covered taxpayer fails to make adequate disclosure of the required information regarding its uncertain tax positions.