The IRS Large Business and International Division has issued guidance to examination teams on the procedures and requirements they are to follow when reviewing and using Schedule UTP, Uncertain Tax Position Statement, in conjunction with their examinations.
Schedule UTP requires certain corporations to report each federal income tax position taken on their returns for which two conditions are satisfied:
- The corporation took a tax position on its federal income tax return for the current or prior year; and
- The corporation or a related party has:
- Recorded a reserve for that position for federal income tax in audited financial statements, or
- Did not record a reserve for that position because the corporation expects to litigate the position. Tax positions taken in years before 2010 need not be reported.
Public or privately held corporations that issue, or are included in, audited financial statements and file a Form 1120, Form 1120-F, Form 1120-L or Form 1120-PC must report their uncertain tax positions on Schedule UTP if they satisfy the total asset threshold.
Under a five-year phase-in, corporations that have total assets of at least $100 million must file Schedule UTP starting with 2010 tax years. The total asset threshold will be reduced to $50 million starting with 2012 tax years and to $10 million starting with 2014 tax years.
The division has issued guidance on how its examiners should use Schedule UTP when examining corporate returns. The guidance includes the following:
- The presence of the Schedule UTP should not, by itself, be the sole factor used to determine whether to proceed with an examination.
- Examiners may ask for information about the relevant facts affecting the tax treatment of positions disclosed on Schedule UTP. However, they cannot ask for an explanation of the rationale for determining that the issue was uncertain or for an analysis of support for or against the tax position.
- Examiners may not ask for copies of workpapers used to prepare Schedule UTP.
If the corporation’s financial statements reflect an increase in reserves, but the filed return did not include a Schedule UTP, examiners are told they cannot ask about the makeup of the reserves. They may only ask the taxpayer to confirm that there are no issues to be disclosed according to the Schedule UTP reporting requirements.