Presenting a live 110-minute teleconference with interactive Q&A Uncertain Tax Positions: New Schedule UTP Requirement for Many Companies in 2013 Making Complex Disclosure Decisions as IRS Reduces its Filing Threshold WENESDAY, FEBRUARY 13, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Cherie Hennig, Associate Professor of Accounting, University of North Carolina at Wilmington , Wilmington, N.C . For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Uncertain Tax Positions: New Schedule UTP Requirement for Many Companies in 2013 Seminar Feb. 13, 2013 Cherie Hennig, University of North Carolina at Wilmington cheriehennig@msn.com
Today’s Program Why Schedule UTP? Slide 8 – Slide 19 Schedule UTP Reporting Requirements Slide 20 – Slide 32 Accurately Completing Parts I, II And III Slide 33 – Slide 44 Disclosure Requirements Slide 45 – Slide 67 Conclusions Slide 68 – Slide 69
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Cherie Hennig, University of North Carolina at Wilmington WHY SCHEDULE UTP?
High Expectations For Schedule UTP!! • IRS expects Schedule UTP to: – Reduce time it takes to find audit issues – Give agents and taxpayers more time during tax audits to discuss the issues – Help to identify areas of uncertainty that require additional IRS guidance – Allow IRS to prioritize the selection of returns to audit and the issues to examine during the audit 9
Who Is In Charge? • The Large Business & International Division (LB&I) maintains a centralized review process so that it can: – Review every Schedule UTP – Analyze these filings to determine if the disclosures comply with the instructions – Select issues for audit and identify trends – Identify gaps in guidance and move to fill those gaps – Determine the proper use and treatment of information contained on the schedules 10
Steven T. Miller, IRS Deputy Commissioner, Service and Enforcement, The Tax Executives Institute, Mid-Year Conference March 26, 2012 • According to SEC data, LB&I taxpayers are reporting large reserves due to uncertain positions as unrealized tax benefits. – Although we can’t tell whether these reserves relate to federal, foreign or state tax uncertainties, we need to pay attention to them. 11
Why Schedule M-3? • Like Schedule M-1, Schedule M-3 provides the IRS with information about book-tax differences. • Schedule M-3 provides MUCH greater detail than Schedule M-1. because it requires a taxpayer to: • Separately state each transaction giving rise to a book-tax difference (no materiality threshold, i.e. no dollar or percentage de minimis test ), and • Identify whether each difference is permanent or temporary • IRS FAQS: http://www.irs.gov/businesses/corporations/article/0,,id=136967,00.html • Query? If Schedule M-3 is doing its job, why do we also need Schedule UTP? 12
Why Schedule UTP? • IRS Commissioner Douglas Shulman characterized the Schedule UTP disclosure initiative as a “reasonable approach” that will give the IRS the information needed “without asking taxpayers to divulge the strengths or weaknesses of their uncertain tax positions.” (www.irs.gov/newsroom/article/0,,id=221280,00.html) – Speech, Tax Executives Institute on April 12, 2010 • IRS FAQ Web site for UTP: http://www.irs.gov/ businesses/article/0,,id=237538,00.html) 13
Ann. 2010-9 And Ann. 2010-75: Reporting Of Uncertain Tax Positions • Annual disclosure of uncertain tax positions to improve tax compliance and administration • On 9/7/2010, the IRS issued proposed Reg. 1.6012-2, giving it the regulatory underpinning to require certain corporations to attach the Schedule UTP to their tax returns. • Schedule UTP will ultimately be required of all corporate Schedule M- 3 filers that issue GAAP financial statements. – Pass-through entities are currently exempt. 14
Form 1120 UTP Filers # Of # Of UTPs Year UTP Asset Size Returns Filed Required $10,000,000 - $50,000,000 36,000 ? 2014 $50,000,000 - $100,000,000 6,000 ? 2012 More than $100,000,000 8,000 2,100 2010 Total 50,000 15
UTP Filing Results For 2010 • 2,144 UTP Schedules – (includes 1120-PC, 1120-L, 1120-F) • 4,766 UTP disclosures • 50% of returns had only one UTP. • Top three IRC Code sections – 41: Research tax credits – 482: Transfer pricing (21%) – 162: Trade and business expenses • 40% of schedules were prepared by Big Four accounting firms. • 3% had inadequate explanations. 16
Why UTP For Mid-Sized Corporations? • “I also want us to move more deeply into the mid -market – those firms between $10 and $250 million in assets. • “Up to now, our presence in the mid -market – where we currently have about 11.9% coverage – hasn’t been as robust as we would like it to be. • “I believe many mid -market corporations may have the same issues as larger entities, and perhaps additional issues as well. • “As UTP transitions into more segments of the community this may become clearer.” – Steven T. Miller, IRS Deputy Commissioner 17
Disclosure Requirements Likelihood Of Success And Disclosure Position Form Form UTP (Other Than Reportable Transactions) 8275 0% to Frivolous position: “Patently improper” - 20% position should never be taken on a return No No 20% to Reasonable basis: No taxpayer penalty if 33% position adequately disclosed on the return Yes 1 33% to Realistic possibility: No tax preparer penalty if 40% adequately disclosed on the return Yes 40% to Substantial authority; no Sect. 6662 penalty 50% No 50% to More likely than not: >50% chance of success 99% 100% Certain No No 1 If UTP filed, Form 8275 not required 18
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Cherie Hennig, University of North Carolina at Wilmington SCHEDULE UTP REPORTING REQUIREMENTS
Reporting Requirements • Uncertain tax positions affecting the federal income tax liability: – Income recognized for financial income but not recognized on the tax return – Deductions taken on the tax return but not deducted for financial income – Information regarding any tax credit that could be reduced or disallowed upon audit • Report when: – A tax position is taken on U.S. federal income tax return for the current or prior tax year, AND – Either corporation or related party has recorded a reserve with respect to that tax position for federal income tax in audited financial statements, OR a reserve for that tax position was not recorded because the corporation expects to litigate the position 21
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