Uncertain Tax Positions: Internal Revenue Service Releases Final Schedule UTP and Accompanying Instructions Effective for 2010 Tax YearsSullivan & Cromwell LLP - September 28, 2010
On September 24, 2010, Douglas H. Shulman, Commissioner of the Internal Revenue Service (the “IRS”), announced the release of an eagerly awaited final Schedule UTP, Uncertain Tax Position Statement, and accompanying instructions, which require certain corporate taxpayers to report uncertain tax positions on their annual tax returns. The final schedule is effective for the 2010 taxable year but, consistent with the draft instructions released earlier this year, the final instructions contain a transition rule providing that tax positions taken in a taxable year beginning before January 1, 2010, need not be reported.
Among the most significant differences between the draft schedule and instructions and the final schedule and instructions are (1) no reporting of a maximum tax adjustment relating to each reported tax position, (2) no reporting of the rationale and nature of uncertainty in the concise description of each reported tax position, (3) no reporting of tax positions for which no reserve was recorded on the taxpayer’s audited financial statements due to a determination that it was the IRS’s administrative practice not to raise the issue during an examination and (4) a five-year phase in for the application of Schedule UTP to taxpayers with less than $100 million in assets.
In conjunction with Commissioner Shulman’s speech and the release of the final schedule and instructions, the IRS simultaneously released (1) Announcement 2010-75, discussing certain changes that were made to Schedule UTP and the accompanying instructions in response to public comments (the “Announcement”), (2) Announcement 2010-76, discussing modifications to and expansions of the current IRS policy of restraint in response to the implementation of Schedule UTP and (3) a Directive for all Large Business and International division personnel regarding implementation of Schedule UTP. Significantly, the modifications to the IRS policy of restraint provide that if a document is otherwise protected under the attorney-client privilege, the tax practitioner-client privilege or the work-product doctrine and the document was provided to an independent auditor as part of an audit of the taxpayer’s financial statements, the IRS will not assert during an examination that privilege has been waived by such disclosure.