Prepare for New FIN 48 Disclosure Requirements

New Schedule UTP gives IRS auditors a treasure map to your company’s assets

Despite strong opposition from CPA firms and corporate taxpayers, the IRS is moving forward with its bombshell mandate requiring corporations with more than $10 million in assets to disclose uncertain tax positions (UTP) in detail on the newly released Schedule UTP for tax years beginning in 2010.

This move, together with current Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC) mandates on provisioning for current tax payables and deferred tax assets, is certain to increase the pressure on corporate tax professionals.

Martin E. Martinez, CPA, Shareholder-Tax Services and tax lead for FIN 48 issues at Houston-based Fitts, Roberts & Co., P.C. shares his perspective on the issues.

“It’s like giving the fox the keys to the henhouse,” Martinez says. For example, say you are taking a $1 million domestic production activities deduction and reserving $100,000 on the financials for FIN 48 purposes. Assume the client has a 40 percent effective tax rate. On Schedule UTP the taxpayer must show the $400,000 as the maximum tax liability, include up to three relevant code sections, and provide a concise explanation of the issue.

“The rationale is that the IRS wants to streamline the audit process, but in effect they are asking taxpayers to identify the high-dollar tax issues. If I was an IRS auditor, that is where I would spend my time,” Martinez says.

He offers these action steps corporate tax departments should take now:

Identify and carefully maintain the FIN 48 issues you’re already disclosing. But watch out: “You may face disclosures under Schedule UTP not required for FIN 48,” Martinez says — for example, reserves not recorded based on administrative practice. One example is capitalizing costs vs. expensing them. Because tax law does not proscribe a threshold dollar amount, that becomes a Schedule UTP issue. Another example: UTPs that are not reserved in your balance sheet because you expect to litigate and win. Those will need to be identified and reported on Schedule UTP along with the maximum tax amount.

Consult with your tax attorney about drafting the “concise description” Schedule UTP requires, so that it is compliant, but does not give away the store. Have the attorney engage your CPA, so that the related workpapers enjoy attorney-client privilege, subject to the Supreme Court’s decision to let the Textron ruling stand.

Use some kind of tracking mechanism, such as CorpSystem® Workpaper Manager, to roll FIN 48 and Schedule UTP items forward quarterly. “Identification, maintenance and tracking are absolutely essential for corporate tax departments now,” Martinez says.

This story is from the CCH e-newsletter Figures, written specifically for corporate tax professionals. Figures offers tips, tricks and ideas about how to increase your organization’s productivity and efficiency.  Every issue also features insights with a corporate tax professional

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