FIN 48, Accounting for Uncertainty in Income Taxes. Interpretation of SFAS 109, Accounting for Income Taxes

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1 FIN 48 History of FIN 48 FIN 48, Issued in July 2006 Interpretation of SFAS 109, Accounting for Income Taxes FSP FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 FSP FIN 48-2, Effective Date of FASB Interpretation No. 48 FSP FIN 48-3, Effective Date of FASB Interpretation No. 48 ASU , Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities 1

2 FSP FIN 48-2, Effective Date of FASB Interpretation No. 48 FSP FIN 48-2, Effective Date of FASB Interpretation No. 48 Issued in February 2008 Deferred FIN 48 for nonpublic enterprises until annual financial statements for fiscal years beginning after December 15, 2007 In 2008, PCFRC requested that the FASB exempt private companies from all of the requirements of FIN 48 FSP FIN 48-3, Effective Date of FASB Interpretation No. 48 FSP FIN 48-3, Effective Date of FASB Interpretation No. 48 Issued in December 2008 Deferred FIN 48 for nonpublic enterprises until annual financial statements for fiscal years beginning after December 15, 2008, BUT Required explicit disclosure of the election to defer FIN 48 AND Disclosure of current accounting policy for evaluating uncertain tax positions in each of the financial statements presented to which the deferral applies 2

3 ASU , Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities ASU , Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities Issued in September, 2009 Addressed: Definition of a tax position Attribution of income taxes Related entities Disclosures Uncertainty in Income Taxes Codified in ASC 740, Income Taxes Effective for fiscal years beginning after December Effective for fiscal years beginning after December 15, 2006 Deferred multiple times for non-public entities Non-public = fiscal years beginning after December 15,

4 Scope All tax positions accounted for under FASB ASC 740 Current or future reduction in taxable income Decision not to report a transaction Assertion that company is not subject to taxation Applies to any tax based on income Any concept of revenue minus any costs Texas Margin Tax Applies to situations where the uncertainty is about the timing, amount, or validity of the deduction Scope issues Does not apply to sales use value-added or property taxes Does not apply to sales, use, value added, or property taxes Does apply to timing issues (expense vs. capitalize) Does apply to nexus issues potential for a permanent liability (with interest accruing in perpetuity) 4

5 Interrelation: Book Income and Taxable Income Taxable income Book income Taxable income based on tax positions more likely than not to be sustained in audit Tax to be paid when audited (settlement) Taxable income reported on tax return Tax paid based on tax return Tax computed on book income -----Unrecognized tax--- benefit liability Deferred income taxes What Is a Tax Position? A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. The term tax position also encompasses, but is not limited to: A decision not to file a tax return An allocation or a shift of income between jurisdictions The characterization ti of income or a decision i to exclude reporting taxable income in a tax return A decision to classify a transaction, entity, or other position in a tax return as tax exempt An entity s status, including its status as a pass-through entity or a taxexempt not-for-profit entity 5

6 What Is Meant by Uncertain? Quite simply: A tax position that is not certain Question: What is a tax position that is not certain? Answer: A tax position that is subject to this guidance Question: What is a certain tax position? Answer: A tax position that is MLTN to be sustained based on the technical merits and, further, would not be subject to settlement with the taxing authority Application issues Recognition If a dispute with the taxing authority were taken to the court of last resort, is it more likely than not that the tax position would be sustained as filed? Measurement Largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority 6

7 Recognition issues Evidence may consist of unambiguous tax law, prior experience with taxing authority, administrative practices and precedents Each tax position must be evaluated separately (no off-sets) Opinion from outside counsel Historical action of a particular agent or examiner Financial statement effects recognition If recognition threshold is not met, no benefit is recognized Financial statement tax expense would be higher than tax return by full benefit of tax position Recognize a liability for unrecognized tax benefits Reduce income tax refund receivable Reduce a deferred tax asset (e.g., if tax position increases an NOL carryforward) Increase a deferred d tax liability (e.g., if tax position i increases an asset s tax basis) Combination of any of the above 7

8 Reassessing recognition At each reporting date When the tax matter is ultimately resolved through negotiation or litigation When the statute of limitations has expired If recognition threshold is no longer met, derecognize benefit in its entirety Using a valuation allowance for de-recognition is not permitted Measurement issues Presume that taxing authority has full knowledge of all relevant information Start with largest possible outcome Go to next largest possible outcome Not a probability-weighted outcome or a single best estimate Financial statement effects measurement Difference in financial statement benefit and full benefit is recognized as higher tax expense Use of a valuation allowance is not permitted 8

9 Uncertainty in Income Taxes ASU , Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities Issued September, 2009 Addressed: Definition of a tax position Attribution of income taxes Related entities Disclosures Disclosures Impact on effective tax rate Tabular reconciliation of uncertain tax positions Tabular reconciliation of uncertain tax positions Interest and penalties Unrecognized tax benefits that will significantly increase or decrease within 12 months Description of tax years that remain subject to examination by major tax jurisdictions 9

10 Disclosures Impact on effective tax rate Tabular reconciliation of uncertain tax positions Interest and penalties Unrecognized tax benefits that will significantly increase or decrease within 12 months Description of tax years that remain subject to examination by major tax jurisdictions Uncertainty in Income Taxes Effective [beginning of fiscal year, e.g., July 1, 2009], the Company implemented the new accounting requirements associated with uncertain income tax positions using the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes. That guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-thannot that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the guidance and in subsequent periods. This guidance also provides for measurement, derecognition, classification, interest and penalties, li accounting in interim i periods, disclosure and transition. ii As of [end of fiscal year, e.g. June 30, 2010], the Company had no uncertain income tax positions that qualify for either recognition or disclosure in the financial statements. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before

11 New IRS Schedule Schedule UTP Required for taxpayers with Uncertain tax positions Audited financial statements Assets of $100 million or more (2010) $50 million or more (2012) $10 or more (2014 Begins with 2010 tax year for Form 1120 Form 1120-L Form 1120-PC Form 1120-F Does not apply to pass-through entities (for now) Already required on Form 990 (Schedule D) 11