The IRS has revised its draft changes to uncertain tax position (UTP) reporting rules for tax year 2022 after receiving pushback from stakeholders, but the agency mostly kept a controversial new requirement intact.
On December 22, the IRS released final revisions to Form 1120, Schedule UTP, and instructions to be used during the upcoming tax filing season. A draft of the revised schedule was made available October 11. For more on the draft form and instructions, see IRS Makes Changes to Uncertain Tax Positions Reporting (10/12/2022).
Schedule UTP has been used since September 2010 by certain corporations to report information about tax positions affecting their income tax liabilities. Taxpayers expected to submit the schedule are those that file Forms 1120, 1120-F, 1120-L, or 1120-PC, have assets equal to or exceeding $10 million, and have recorded a liability for unrecognized tax benefits in audited financial statements.
Pursuant to the revised Schedule UTP, taxpayers must also now cite “authoritative sources” contrary to their taken position, such as IRS guidance or legal precedent. This requirement drew criticism during the public comment period. The IRS’ revised statement on the Schedule UTP changes acknowledged that the draft instructions included citations for guidance not published in the Internal Revenue Bulletin (IRB).
“In response to comments, however, that section of the instructions has been revised to list only published IRB guidance and court decisions,” the agency said.
December 19 comments on the draft changes submitted by C. Wells Hall, chair of the American Bar Association’s Tax Section, opposed the addition of the contrary authorities column. According to the ABA, “requiring taxpayers to disclose their conclusion that a tax position is contrary to specific legal authority raises significant privilege concerns because that conclusion may reflect an assessment of the hazards of the tax position or legal analysis of the arguments against the tax position.”
The Tax Section’s comments continued that requiring “the taxpayer to have his tax adviser identify for disclosure contrary authorities of any kind risks invading the privilege and essentially turns taxpayer’s counsel into an advocate against her client.”
Jan Lewis, chair of the American Institute of Certified Public Accountants’ Tax Executive Committee, recommended in comments sent to IRS leadership November 18 that the agency delay the implementation of the new Schedule UTP by a year (tax year 2023 instead of retroactively to tax year 2022) to allow time for additional guidance an alleviate the “significant burden” put on taxpayers and practitioners.
Lewis and the AICPA also raised issue with the contrary authorities requirement, writing that it conflicts with the IRS’ so-called policy of restraint because “disclosure of the tax position analysis as it relates to estimates of potential tax liabilities for ASC 740 purposes and related documentation in essence amounts to a disclosure of tax accrual workpapers.”
“This is inconsistent with longstanding IRS position on tax accrual workpapers,” Lewis’ comments continued. “Historically, the IRS has demonstrated administrative sensitivity and restraint by not routinely seeking tax accrual workpapers for examination purposes.”
The AICPA recommended scrapping the requirement altogether.
“The draft Schedule UTP may violate the IRS’s policy of restraint,” echoed law firm Steptoe & Johnson, LLP in its November 30 tax controversy newsletter. “Requiring corporations to report the incremental amount of each uncertain tax position, along with more detailed descriptions for each position, seems to constitute a request for a portion of the tax accrual workpapers.” IRS Announcement 2010-76 has more information on the IRS’ policy of restraint and the agency said in its revised statement that the policy will remain “in effect.”
For more information on reporting uncertain tax positions, see Checkpoint’s Federal Tax Coordinator ¶S-4460.
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