Uncertain Tax Positions

Uncertain Tax Positions

August 08, 2005 | By Keith Martin in Washington, DC

UNCERTAIN TAX POSITIONS may force American companies to restate earnings later this year. 

The US Financial Accounting Standards Board is collecting comments on proposed new rules that experts say will require companies to reserve against — and in some cases reverse — tax benefits they claimed in the past unless they are roughly 75% certain the benefits will be sustained if challenged by the Internal Revenue Service on audit. This applies only to tax benefits in tax years that are still open to IRS audit. Comments are  due by September 12. 

FASB wants the new rules to apply to fiscal years ending after December 15, 2005.

The board has had rules for some time on accounting for income taxes, but the rules were imprecise about when companies must reserve part of the tax benefits they expect from a transaction, and how much, due to uncertainty about the US tax rules.

The new “interpretation” the board proposes requires companies to assume that each tax position will be examined by the IRS, and it allows a company to recognize the position only when it is clear the position is
probable of being sustained on audit. FASB suggests a number of factors that could lead a company to  this conclusion. An example is where it has a “should” opinion from an outside tax counsel. Benefits that are not yet at least “probable” cannot be reported.

Once a position is probable of being upheld, then the company must decide how much of the benefit to reserve. This calls for a best estimate of risk. Legal developments, like an IRS announcement or news that the tax agency is challenging others on audit, might require revisiting the amount reserved. Such developments could also require reversing altogether a benefit that was claimed earlier. 

Any such reversal would show up as a liability on the company’s financial statement for the year the reversal occurs. Restatement of prior year financial statements will not be permitted.

The FASB proposal could make for a busy year end as US companies are forced to review open tax positions. The proposals are in an “exposure draft” called “Accounting for Uncertain Tax Position, an interpretation of FASB Statement No. 109.”