Are You Uncertain About Uncertain Tax Positions?
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Even if you’ve never had to worry about reporting Uncertain Tax Positions (UTPs) on your company’s tax return, that may change. Starting with the 2014 tax year, corporations that have assets of at least $10 million and meet other filing requirements — such as filing audited financial statements or including UTPs in others’ audited statements— must file Schedule UTP (Form 1120), “Uncertain Tax Position Statement.” That’s a shift, as the UTP reporting rules were limited to companies with assets of at least $50 million for the 2012 and 2013 tax years.
The expanding scope of UTP reporting is significant. According to some tax experts, filing this schedule may increase the chance that your company will be audited.
A little background
Although it may seem counterintuitive, some companies take positions on their tax returns that they’re not sure will be upheld. Perhaps the guidance available is ambiguous or it’s unclear if the tax regulations apply to the business’s specific situation. For example, a company may claim a research tax credit, yet not be completely confident that their rationale for taking the credit will hold up. Indeed, research credits have accounted for the largest percentage of UTPs reported, according to IRS statistics.
Some definitions can also help in understanding uncertain tax positions. The IRS defines a UTP as a position taken on a tax return for which the corporation or a related party has recorded a reserve in its audited financial statements. A UTP also refers to instances in which a company hasn’t recorded a reserve for the position because it expects to litigate it. And a “tax position” is a position taken on a return that, if not sustained, would lead to an adjustment either in a line item on the return, or a schedule or form attached to it.
While the IRS began requiring organizations to report UTPs in 2010, the framework was laid in 2006. That’s when the Financial Accounting Standards Board issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Prior to this, businesses had different ways of accounting for uncertain tax positions in their financial reports. That could result in inconsistencies between statements.
Asking corporations to identify their UTPs is intended to cut the time that the IRS requires to review returns. That can help both the agency and taxpayers.
How to address reporting
As of their 2014 returns, corporations must file Form UTP if they meet several criteria — for example, if the corporation files Form 1120 or one of its offshoots; has assets of at least $10 million; issues audited financial statements or is included in others’ audited statements; and has one or more tax positions that must be reported. The reporting requirements apply whether the audited statements are prepared based on GAAP, IFRS, other country-specific accounting standards or a modified version of one of these. Form UTP is attached to the company’s income tax return.
Businesses must include a “concise description” of their UTPs on Schedule UTP. The IRS has issued guidance as to what it will — and won’t — consider a concise description. A statement such as “this is a research credit issue” typically won’t cut it. The IRS has provided an example of an acceptable description: “The taxpayer incurred support department costs that were allocated to various research projects based on a methodology the taxpayer considers reasonable. The issue is whether the taxpayer’s method of allocating costs is acceptable by the IRS.”
Businesses don’t need to report the amount of the tax adjustments that could apply if the IRS prevails in any dispute about their positions. However, they do need to rank the positions, based on the size of the reserve recorded for it. Companies must identify as “major tax positions” those that account for at least 10% of all the tax positions in their financial statements.
Confused? Work with a pro
The regulations around UTPs are complicated. So, work with your tax advisor. They can provide additional information and guidance.