With its long-held mission to improve tax compliance and administration, the IRS routinely issues new reporting requirements designed to “increase the transparency and efficiency” of examining corporate tax returns.
But recently, the IRS had to admit that it had gone too far.
The episode began in January 2010, when the agency announced plans to develop a new schedule to be filed with corporate returns. The idea was to require some businesses to divulge more information about their “uncertain tax positions” – those grey-area items on a financial statement that corporations are permitted to recognize as a benefit in their financial report, so long as the company’s interpretation can be considered “more likely than not” to prevail if challenged.
In practice, many companies are already required to analyze their uncertain tax positions and document them in their financial statement work papers under the generally accepted accounting principles laid out in an accounting industry standard known as FIN 48.
But what the IRS was proposing would require some corporate taxpayers to report those same uncertain tax positions – and the interpretations behind them – in far greater detail, and include them as part of their annual corporate tax returns.
In sports parlance, it would be like handing your playbook to the other team.
The IRS said the new reporting requirement was needed because tax issues had grown more complex, and that creating a new ability to perform “smart” audits would make their jobs more efficient.
“Today we spend up to 25 percent of our audit time searching for issues rather than having a straightforward discussion with the taxpayer about the issues,” said IRS Commissioner Douglas Shulman in prepared remarks.
But many corporate taxpayers were concerned that it amounted to providing the IRS with an audit road map. The outcry was immediate and severe.
“This is a massive, very important shift,” one tax professional told The New York Times. “Corporations have treated audits as a game of ‘come see what you can find.’ Now the balance of power will shift to the IRS.”
As is typical of many new reporting requirements proposed by the IRS, a public comment period followed the release of the draft schedule in April. The pushback from accounting and tax professionals, worried companies and industry groups was particularly fierce.
Some accused the agency of requiring accountants to do the IRS’s work for them. Others doubted whether the new requirement would really result in greater efficiency. Still, others predicted that once in agency hands, a list of uncertain tax positions would give the IRS an unfair leg up, and hamstring that company’s ability to negotiate a reasonable outcome to any government audit of its tax return.
When the final version of Schedule UTP was released in October, it appeared as though the volume of negative comments received by the IRS during the comment period had actually produced a more restrained reporting requirement.
The earlier requirement for companies to provide a concise rationale for its positions was gone, as was the requirement for corporate taxpayers to divulge their subjective evaluations and assessments, which had stirred concern about the IRS’s increased access to a corporation’s privileged tax accrual work papers.
The impact of the final Schedule UTP was also softened with a phased-in approach to filing. Whereas the draft version applied immediately to all business taxpayers with total assets in excess of $10 million, the final version calls for companies with $100 million or more to file in 2010; companies with $50 million or more to file in 2012; and companies with $10 million or more to file in 2014.
Certainly, the new reporting requirement had been scaled back, and it appeared that the IRS had been listening. Yet, concerns still remain. In a recent article in the Journal of Accountancy, the American Institute of Certified Public Accountants (AICPA) pointed out that, despite the changes:
Smaller companies will be disproportionately burdened with the extra work of completing the schedule when it is fully phased in in 2014.
A potential burden looms in future years on pass-through entities and taxexempt organizations.
The new requirement amounts to duplicative reporting; the information received on the new schedule may not ultimately benefit the government.
Thanks largely to the five-year phase-in of Schedule UTP, the extra burden on small businesses has been averted – for now. But the new requirements amount to a changing disclosure landscape that will undoubtedly come with a host of technical questions and concerns for smaller companies as the tax years roll on. For companies that may one day exceed the phase-in thresholds set by the IRS, it may be wise to put an analysis of Schedule UTP’s potential impact on your tax planning radar screen.