Uncertain Tax Positions

Uncertain Tax Positions

April 10, 2010

Uncertain tax positions will have to be flagged on US tax returns starting this year using a new form the Internal Revenue Service released in mid-April.

The form — called a Schedule UPC — will have to be attached to corporate tax returns filed for 2010.

The IRS hopes that forcing corporations to disclose tax positions about which they are uncertain will save the government time in tax audits. Critics speculate that IRS agents will be able to save even more time by simply disallowing all the positions a company identified.

The forms will have to be filed for now only by corporations that issue audited financial statements and have at least $10 million in uncertain tax positions and also have assets of at least $10 million. The IRS said it will decide later when partnerships, real estate investment trusts and tax-exempt entities must start filing.

The instructions for the form indicate the agency is looking only for tax positions for which the company recorded a reserve in an audited financial statement or decided not to record a reserve based on an intention to litigate.

Positions do not have to be reported that were taken on past tax returns for tax years beginning before December 15, 2009 or in short tax years that started after December 15 and ended by December 31, 2009.

The form requires the company to describe each uncertain position concisely, list the sections of the US tax code that are involved and show the maximum amount the company would have to pay in additional taxes if the position were disallowed. The potential tax liability is calculated by assuming a 35% tax rate and ignoring any net operating losses or tax credits that the company might be able to use as shelter.

The form is a draft. The agency asked for comments by June 1. The draft form and instructions were released as part of Announcement 2010-30.

Keith Martin