On September 24, 2010, the IRS released final Schedule UTP and its corresponding instructions that require certain corporations with audited financial statements to report uncertain tax positions.  Earlier this month, on September 9, 2010, a notice of proposed rulemaking was issued setting forth a proposed regulation that specifically authorizes the IRS to require the filing of Schedule UTP.  A final rule is expected to be promulgated before the end of the year.

While the need to report uncertain tax positions is still not a welcome idea to many taxpayers, in issuing the final Schedule UTP, the IRS has backed off on some particularly onerous positions.  In particular, final Schedule UTP, unlike the proposed draft released earlier this year, does not require any reporting of:

• the dollar amount of the maximum tax adjustment;
• the rationale and nature of the uncertainty when describing the uncertain position; or 
• positions for which no reserve is taken because of IRS administrative practice to not raise the issue during an examination.

In addition, the reporting requirements are now phased in over a five-year period based on a corporation’s size.

Taxpayers Required to File Schedule UTP

Schedule UTP applies to corporations that file IRS Forms 1120, 1120-F, 1120-L or 1120-PC if:

• The corporation or a related party issued audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year;
• The corporation has assets that equal or exceed $100 million (this threshold is reduced to $50 million beginning with the 2012 tax year and to $10 million beginning with the 2014 tax year); and 
• The corporation has one or more tax positions that must be reported on Schedule UTP.

Tax Positions Required to Be Reported

Schedule UTP requires a corporation to report tax positions for which either the corporation or a related party has recorded a reserve with respect to the position for U.S. federal income tax in its audited financial statements, or the corporation or related party did not record a reserve for the tax position because the corporation expects to litigate the position.  In addition to reporting tax positions for the current year, a corporation must report tax positions for prior years if they were not previously reported.  However, tax positions taken before the 2010 tax year do not need to be reported, even if a reserve is recorded with respect to that tax position.

Information Required Regarding Reportable Tax Positions

In reporting uncertain tax positions, the corporation must provide the following information:

• the primary sections of the Internal Revenue Code sections relating to the tax position; 
• a concise description of the position including the relevant facts affecting the tax treatment of the position and information to apprise the IRS of the identity of the tax position and the nature of the issue; 
• an identification as to whether the position creates temporary or permanent differences, or both;
• the employer identification number of any pass-through entity to which the tax position relates, if any;
• a ranking of the tax positions by size; and
• an identification as to whether the position is a major tax position (i.e., the estimated size of the position is more than 10% of the estimated size of all positions reported on Schedule UTP). 

While relative size and a ranking of the size of tax positions are required (except with respect to positions for which there is an expectation of litigation), affected corporations are not required to provide an actual dollar amount estimate for the tax positions on Schedule UTP or to provide information regarding the size of the reserve recorded with respect to the tax positions.

© 2010 Perkins Coie LLP