Reporting Uncertain Tax Positions:

Transcription

1 Presenting a live 110 minute teleconference with interactive Q&A Reporting Uncertain Tax Positions: Responding to Latest IRS Guidance Making Complex Compliance Decisions With Schedule UTP Under Final Regs and IRS FAQs WEDNESDAY, AUGUST 24, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Kevin Johnson, Shareholder, Chamberlain Hrdlicka White Williams & Martin, West Conshohocken, Pa. Kevin Spencer, Partner, McDermott Will & Emery, Washington, D.C. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Reporting Uncertain Tax Positions: Responding to Latest t IRS Guidance Seminar Aug. 24, 2011 Kevin Spencer, McDermott Will & Emery kspencer@mwe.com Kevin Johnson, Chamberlain Hrdlicka White Williams & Martin kjohnson@chamberlainlaw.com

6 Today s Program Positions That Must Be Reported [Kevin Spencer] Slide 7 Slide 30 Related Compliance Issues [Kevin Johnson and Kevin Spencer] Slide 31 Slide 38 Recent Audit Issues [Kevin Johnson] Slide 39 Slide 47

7 Kevin Spencer, McDermott Will & Emery POSITIONS THAT MUST BE REPORTED

8 Uncertain Tax Position: How Did We Get Here? IRS compliance objectives Certainty, consistency and efficiency Evolution of the income tax return Schedules, schedules, and more schedules! Arthur Young & Co. (1984) Ever-evolving policy of restraint Notice Financial i statement t t reporting requirements FASB Statement 109 Accounting for Income Taxes FIN 48 (July 2006) Clarifies FASB 109, applicable to all GAAP entities 8

9 Announcement Of Schedule hd UTP Inquiry by the Senate Permanent Subcommittee on Investigations Fall 2009: Comments by Commissioner i Shulman and Chief Counsel Wilkins January 2010: Announcement and Shulman speech to the New York Bar Tax Section April 2010: Announcement and draft Schedule UTP and instructions September 2010: Final Schedule UTP 9

10 Taxpayers Subject To Schedule UTP Reporting Requirements ALL Taxpayers that: File Form 1120 series (1120, 1120L, 1120PC, 1120F) income tax returns Prepare audited financial statements (or are included on the financial statements of a related entity) Related per IRC 267(b), 318(a) or 707(b) Determine reserves for uncertain federal income tax positions under FIN 48 or other accounting standards Have $10 million or more in assets Five-year phase in: $100m 2010/2011; $50m 2012/2013; and $10m 2014 and beyond 10

11 Corporate Taxpayers Only Does NOT apply to: Partnerships Pass-through entities OR Tax exempt entities For now! 11

12 Shd Schedule UTP Reporting Triggers Corporate taxpayer must file Schedule UTP if: Taxpayer has taken tax position on U.S. federal income tax return for current or prior year AND, EITHER: The taxpayer (or related party) recorded a reserve for U.S. income tax position in audited financials. OR The taxpayer did not record a reserve because it expects to litigate the position and prevail. 12

13 Audited d Financials i Independent auditor expressed opinion (qualified, unqualified, disclaimed, or adverse) For purposes of Schedule UTP, must report a tax position if audited financials under: U.S. GAAP IFRS (International Financial Reporting Standards) OR ANY OTHER ACCOUNTING STANDARD 13

14 What Is A Tax Position? i Accounting term of art A tax position is a position that an entity takes in a previously filed tax return or which it expects to take in a future tax return, and which it uses to measure current or deferred income tax assets and liabilities. But for Schedule UTP: A tax position on a tax return is a tax position that would result in an adjustment to a line item on that tax return (or would be included in a section 481(a) adjustment) if the position is not sustained. 14

15 Tax Position i Is Imprecise Instructions make clear the definition of tax position is subsumed into whether and when a reserve is recorded. If multiple positions affect a single line item, you must report each separately. But applies only to federal income tax and not to foreign, state, excise, withholding or employment taxes 15

16 When Is A Reserve Recorded? d? Reserve for federal income tax, interest or penalties But subsequent increases/decreases require no scheduling Uncertain tax position or FIN 48 liability stated on financial statements (footnotes) Examples: (1) Increase (reduction) in current or non-current liability for tax, interest or penalties payable (receivable); or (2) Reduction (increase) in deferred tax asset (liability) Can rely on reserve decisions 16

17 Positions i Expected To Litigatei Corporation or a related party determines probability of settling with IRS is less than 50%. AND Under accounting standards, no reserve is recorded, because the taxpayer intends to litigate and has determined it is more likely than not it will prevail on merits in litigation. 17

18 Tax Positions Exempted From Scheduling No scheduling uncertain tax positions taken prior to Jan. 1, 2010, even if reserve(s) recorded in future years No scheduling tax position before taken on return 18

19 Shd Schedule UTP Form Requirements Information items must be disclosed on the Schedule UTP for each uncertain tax position: UTP control number Up to three relevant IRC sections Whether the position is permanent, temporary or both Whether the uncertain position derives from a flow-through entity (EIN) Major tax position? Ranking of tax position The tax year in which the uncertain tax position was taken (when taken in a prior year) A concise description of the position 19

20 Schedule UTP Requirements In Depth UTP No. Arbitrary reference number, taxpayer-assigned, e.g., 1, 2, 3, etc. Primary IRC sections No guidance Timing codes Must be consistent with accounting standards 20

21 Flow Through Uncertain Tax Positions Whether the uncertain tax position is taken by a flow-through entity Currently, Schedule UTP does not apply to partnerships, other pass-throughs or tax-exempts. Must disclose tax positions that flow through to Form 1120 by domestic and foreign non-corporate entities Information challenges to reporting these uncertain tax positions 21

22 Size (Really) Matters! Major tax position Maximum tax adjustment eliminated, but quantification still sought (and required) Greater than 10% of cumulative tax positions Ranking of tax position T for transfer pricing, G for everything else Largest size = Amount reserve recorded (tax, interest, penalties) Annual determination Expectation to litigation can assign any ranking 22

23 No More Rationale, Just Give Us The Facts Concise description Relevant facts Information reasonably expected to apprise the IRS of the identity of the tax position and the nature of the issue Typically not to exceed a few sentences! No hazards assessment or argument Disconnect between the instructions and the examples on what might qualify as concise How to document expectation to litigate? 23

24 Form 8275 Disclosure Schedule UTP concise description is based on information disclosed on Form Instructions to Form 8275 specify that: Your disclosure statement must include a description of the relevant facts affecting the tax treatment of the item. To satisfy this requirement you must include information that reasonably can be expected to apprise the IRS of the identity of the item, its amount, and the nature of the potential controversy. Information concerning the nature of the controversy can include a description of the legal issues presented by the facts. 24

25 Disclose, Disclose And Disclose Again! Complete and accurate disclosure will be treated as Form 8275 disclosure. Satisfies economic substance transaction disclosure under IRC 6662(i) What about Schedule M-3? IRS is studying how to reduce duplicate reporting and whether disclosure would satisfy reportable transaction disclosure requirements, e.g., Form

26 All Teeth, No Bite! No penalties for failing to accurately and completely file Schedule UTP Regulations issued, so non-compliance could be negligence for disregard of rules and regulations But, need a tax underpayment IRS is studying compliance and enforcement, including the possibility of opening an examination or making another type of taxpayer contact. 26

27 IRS Issues Frequently Asked Questions No. 1: Standard for not recording reserve for UTP ( sufficiently certain that no reserve was required ) same as FIN 48 ( highly certain ) Goal is consistency with financial reporting. No. 2: Reserve recorded and eliminated in interim financial statement before 2010 return filed. Still have to schedule? Yes, if the interim statement unaudited. But if reserve eliminated, no. No. 3: Corporation uses NOL or credit carryforward that includes pre tax position. Need to schedule? No, but guidance is forthcoming. No. 4: Are interest and penalties relating to a tax position used to determine rank and size for schedule? If not separately stated in books, then not separately listed. No. 5: No blank schedules please, but many practitioners advise otherwise. 27

28 IRS Issues Frequently Asked Questions (Cont.) No. 6: What s a reserve for Schedule UTP? Uncertain tax position ANYWHERE in financials (including footnotes) reflected in several types of journal entries E.g., increase (decrease) in current or non-current liability (receivable) for tax, interest, penalties No. 7: Schedule even though IRS already knows? Yes. Even if tax position is under audit, still must schedule. Example: Taxpayer reevaluates position because of audit and records a reserve, must schedule No. 8: Changes in circumstances in later year. Originally (2011) no reserve because thought it was correct, but in 2013 determines uncertain and expects to litigate. Must schedule for 2013 No. 9: Merger transaction. A merges into B, B survives. B records reserves for A. Who schedules A (on final return) or B? If B records reserve before A files final return, then A schedules, not B, because it s a prior year uncertain tax position. 28

29 IRS Issues Frequently Asked Questions (Cont.) No. 10: On 2010 returns, taxpayer has NOL or credit carryforward and also records a reserve and schedules it. NOL/credit used on No schedule for 2012 No. 11: No future scheduling of interest accruals on pre-2010 uncertain tax positions No. 12: Must schedule uncertain tax position where corporation records a reserve for a tax position that would result in adjustment to line item if position not sustained 29

30 The Uncertainties Of Schedule UTP IRS is hunting for information and is skeptical of selfassessment system. What to expect: Penalties? Signed under penalties of perjury? Litigation, à la Textron and its progeny More confusion, duplication and expense trying to comply 30

31 Kevin Johnson, Chamberlain Hrdlicka dlik White Williams & Martin Kevin Spencer, McDermott Will & Emery RELATED COMPLIANCE ISSUES

32 IRS Policy Of Restraint IRS expands its policy of restraint 32

33 Policy Of Restraint For Tax Accrual Workpapers IRS current policy of restraint Announcement IRS will generally not request workpapers. But, agency will request tax accrual workpapers if the taxpayer has invested in one or more listed transactions. If just one transaction, IRS will request tax accrual workpapers related to the listed transaction. If two or more listed transactions, IRS will ask for all tax accrual workpapers, regardless of whether they are related to listed transactions. 33

34 IRS Policy Of Restraint Applies To Schedule UTP Workpapers IRS has announced that its policy of restraint will apply to Schedule UTP workpapers. Draft Schedule UTPs Schedules used in determining ranking of issues Drafts of descriptions of issues 34

35 Expansion Of Policy Of Restraint Expansion of policy of restraint IRS has stated that it will not seek tax opinions and other documents that are privileged. IRS will not assert that the taxpayer py has waived any yprivilege on a document by turning the document over to its audit firm in connection with an audit of its financial statements. 35

36 Protecting Privileged il Documents Importance of protective privilege Given IRS policy of restraint, it is crucial to protect privileged documents. Status of tax accrual workpapers pp and other privileged documents in IRS Audits is in flux. Textron, Deloitte cases Fighting IRS summonses and litigating privilege issues is expensive. 36

37 Protecting Privileged il Documents (Cont.) Types of privilege Attorney-client: Protects communications between attorney and client seeking legal advice; waived if document is distributed outside the zone of privilege Tax practitioner privilege: Similar to attorney-client privilege, but applies to non-attorney tax practitioners; also waived if document is distributed outside the zone of privilege Work-product privilege: Protects attorney work-product, thoughts, impressions, legal strategy; generally not waived unless disclosed to a party that makes it likely that adverse party will obtain the information 37

38 IRSShdl Schedule UTPC Central lui Unit IRS announces creation of Central Schedule UTP Unit that will: 1. Study the 2010 Schedule UTPs filed in Identify issues and areas of non-compliance 3. Issue guidance to IRS field agents auditing Schedule UTP issues 4. Identify issues arising in the implementation of Schedule UTP and use of Schedule UTP as an audit tool 5. IRS will initially withhold the 2010 Schedule UTPs from the field until the Schedule UTP Central Unit has reviewed them. 38

39 Kevin Johnson, Chamberlain Hrdlicka White Williams & Martin RELATED AUDIT ISSUES

40 Preparing For Schedule Shdl UTPAdi Audit Will Schedule UTP serve as a template for the IRS exam team s revenue agent s report? Will IRS conduct in depth audits of every issue on the Schedule UTP? Will the IRS set up adjustments for all or most issues on the Schedule UTP? 40

41 Preparing For Schedule UTP Audit (Cont.) Preparing for Schedule UTP audit Prepare file on every issue listed on Schedule UTP Prepare substantiation Be prepared to support your legal theory on the uncertain tax position May have to educate the IRS Exam Team on the issue 41

42 Preparing For Schedule UTP Audit (Cont.) Create an open dialogue with the IRS Exam Team Use the IRS audit planning meeting to set the scope and timing of the IRS audit Are there issues that could be resolved more quickly? Identify issues for which technical resources (financial products specialists, engineers, economist, etc.) or technical guidance from IRS National Office may be needed Know when to get IRS management involved 42

43 Preparing For Schedule UTP Audit (Cont.) Dealing with expect to litigate positions Taxpayers must list issues for which no tax reserve is recorded because the taxpayer would litigate the position if challenged ( expect to litigate positions). Strategy for listing such positions Taxpayers are permitted to list the positions anywhere on the Schedule UTP. Should the taxpayer list all such positions at the end of the Schedule UTP? 43

44 Preparing For Schedule UTP Audit (Cont.) Expect to litigate positions Taxpayers are not required to reveal that a position is one that they expect to litigate. IRS Exam Team should not asks taxpayers py to reveal which uncertain tax positions are expect-to-litigate positions. 44

45 Preparing For Schedule Shdl UTPAdi Audit (Cont.) Schedule UTPs are required for 2010 and later years. Taxpayers are not required to disclose uncertain tax positions for 2009 and earlier years/ What if the IRS Exam Team attempts to use 2010 Schedule UTP to identify issues for an earlier audit cycle? What if 2010 is part of an audit cycle with earlier tax years? 45

46 IRST Training ii For Schedule Shdl UTP IRS training agents for Schedule UTP audits Steven Miller of IRS LB&I Directive (Sept. 24, 2010) IRS agents will be trained on auditing Schedule UTPs. Cautioned agents that not every issue listed on Schedule UTP warrants examination and/or adjustment Success of the Schedule UTP implementation and taxpayer buyin hinges on perception that the IRS is being fair and impartial in auditing Schedule UTP 46

47 Uncharted Territory Schedule UTP is uncharted territory. IRS and the tax community will be learning together how to deal with issue on Schedule UTP. Corporations learning what issues must be listed, working with financial audit firm to determine issues for which tax reserves are required. IRS will need to train revenue agents on auditing Schedule UTP, not getting bogged down on every issue. Corporate tax departments and tax advisors will need to be proactive in order to prevent Schedule UTP audits from getting out of control. 47