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IRS Makes Case for Greater Disclosure from Businesses

February 08, 2010

In a move geared to increase transparency, the IRS has announced that corporate and other business taxpayers now subject to FIN 48 and similar financial reporting rules will be soon required to report uncertain tax positions on their annual Form 1120, U.S. Corporate Income Tax Return or other applicable tax return.  The IRS is currently developing a separate schedule for purposes of this disclosure, and IRS Commissioner Douglas Shulman has indicated that the agency intends to move quickly with the new reporting requirement once all comments have been received.

Although the IRS' new requirement will primarily affect mid-size to large C corporations, passthrough entities are also subject to FIN 48.  The IRS proposal does not preclude partnerships, at least until the IRS further develops the proposal's scope.  In time, greater disclosure is also inevitable for small businesses, especially those operating as corporate entities.  Another possibility on the horizon, and something to watch out for, would be states "piggybacking" the IRS rules and creating their own disclosure requirements.

New Schedule

The IRS is developing a new schedule to be filed by a business taxpayer with one or more uncertain tax positions.  The new schedule will be filed with Form 1120 or other business tax returns.  The new reporting requirement will not take effect immediately and will not apply to tax returns filed in 2010 for the 2009 tax year.

The new schedule will not require taxpayers to disclose the taxpayer's risk assessment or tax reserve amounts.  It will, however, require a "concise description" of each uncertain tax position for which the taxpayer has recorded a tax service in its financial statements.  Taxpayers will also be required to submit the maximum federal tax liability exposure associated with each uncertain tax position that would be due if the position were completely disallowed.  The concise description must also provide the rationale for the uncertain tax position and a concise general statement of the reasons that it is uncertain.

An adequate statement must describe the following:

  • The applicable Tax Code sections and tax years involved;
  • Whether the position involves income, gain, loss, deductions or credits;
  • Whether the position involves a permanent inclusion or exclusion, the timing of an item or both; and
  • Whether the position involves the value or basis of any property or right.

Penalties

The IRS has indicated that it will consider imposing penalties or sanctions on taxpayers that fail to adequately disclose their uncertain tax positions.

For more information, please contact Doug Joseph at 860.561.6829 or djoseph@blumshapiro.com.

 

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