Transcript Title of Presentation

Schedule UTP
ABA Philadelphia Tax Conference
November 14, 2012
J. Richard (Dick) Harvey, Jr.
Distinguished Professor of Practice
Villanova University School of Law/Graduate Tax Program
Agenda

Overview, including history

Selected concerns during development

Observations thus far
2
Overview of Schedule UTP
3
Overview of Schedule UTP
(1 of 2)
Large corporations required to disclose uncertain tax positions (UTP) on
Form 1120




2010/2011 = assets > $100 million
2012/2013 = assets > $50 million
2014 and later = $100 million
Disclosure required when a corporation’s “audited” financial statements 1
either:



1
4
Include a “reserve” for a UTP, or
No reserve is recorded but there is a > 50% probability of litigation (referred to
as the “expect to litigate” provision)
Includes audited financials statements of related parties.
Overview of Schedule UTP
(2 of 2)
Other disclosure required, includes:




Ranking of the tax position by reserve amount
Major tax positions
Whether the tax position is:


Permanent or temporary
Related to transfer pricing
Tax-exempts and pass-through entities currently exempted:



5
Thus, tax positions on pass-through entities not identified on passthrough entity’s return.
However, can be disclosed on owner level’s return.
History that Led to Sch. UTP
IRS had practical difficulties auditing large corporations:


Other disclosure regimes not working well (e.g., reportable transactions,
substantial understatement penalty, and Sch. M-3)

IRS spent substantial time identifying issues

Many issues not identified
Tax Accrual Workpaper (TAW) controversy (e.g., Textron):


IRS wanted to potentially adopt a compromise
Several professionals had suggested a Sch. UTP approach over the years:

6

However, diversity of practice prior to FIN 48 made it difficult

Fin 48 made it easier to require disclosure of specific issues
Selected Concerns During
Development of Schedule UTP
7
Selected Taxpayer Concerns

Would IRS automatically propose adjustments for items
on Sch. UTP?

Would completing Sch. UTP be time consuming?

Would Sch. UTP be adopted by other jurisdictions?
8
Selected IRS Concerns

Would taxpayers try to avoid disclosure through various
means?

Would UTP descriptions be useful?

Should there be a penalty?
9
Observations Thus Far
10
Taxpayer Observations

IRS audit approach

Effort spent completing Sch. UTP

Other
11
IRS Feedback

(1 of 2)
2010 Statistical information as of April 2012:


12
1,947 taxpayers filed Schedule UTP:

21% = Coordinated Industry Case (CIC) taxpayers with 3.1 UTPs per Schedule UTP

79% = other taxpayers with 1.9 UTPs per Schedule UTP
4,186 issues in total were disclosed:

49% of all Schedule UTP returns filed included only one UTP

Top three Code sections disclosed were (i) Secs. 41 (research credit), (ii) 482 (transfer pricing), and (iii) 162
(trade or business expenses)

25% of all UTPs were international issues
IRS Feedback

(2 of 2)
Updated figures as of July 13, 2012:

2,144 taxpayers filed Schedule UTP with 4,766 issues disclosed

Top three Code sections did not change

Ratios described above remained roughly the same

Established teams to analyze Sch. UTP disclosures

Training agents

Not much else
13
Key Question IRS Should be Asking

Are some corporations avoiding UTP disclosure?

If so, how? Possibilities include:

No longer recording reserves:


Truly immaterial reserves
Auditors recording reserves on “net effects” schedule

Using “administrative practice provision”

Arguing “expect to litigate” provision does not apply to highly
certain items

14
Others (e.g., checking box for US sub. Of foreign parents)
Contact Information
J. Richard (Dick) Harvey, Jr.
Distinguished Professor of Practice
Villanova University School of Law and Graduate Tax Program
1-610-519-4474
[email protected]
Recent articles at http://ssrn.com/author=1542659
15