IRS Releases Schedule UTP Statistics for 2011

The IRS recently released Schedule UTP filing statistics for the 2011 tax year. The statistics are not complete as returns from some late fiscal year filers and others still have not been processed.

As of December 2012, the IRS was able to report the following:

  • 1,783 taxpayers filed Schedule UTP with their 2011 returns
  • 83% of all returns with Schedule UTP were filed by taxpayers classified as Industry Case (IC) taxpayers by the Large Business & International (LB&I) Division of the IRS.
  • 4,120 uncertain tax positions had been disclosed
  • Coordinated Industry Case (CIC) taxpayers disclosed an average of 3.8 uncertain tax  positions per Schedule
  • IC taxpayers averaged 2.0 uncertain tax positions per Schedule
  • 47% of Schedule UTP returns included only one uncertain tax position

2011 also was the first tax year that prior year positions were required to be reported on the Schedule.  The IRS has not yet gathered the data to share any statistics to break out the total number of positions reported in the current year and prior years.

No information was released regarding the most frequently reported code sections underlying the uncertain tax positions.  

Read more about Schedule UTP here.

LB&I Announces End of Tiered Issue Process

On Friday, the Large Business and International (“LB&I”) division of the IRS abandoned the Tiered Issue Process according to an announcement to the field by Division Commissioner, Heather Maloy. The IRS will replace the Tiered Issue Process with two “knowledge management groups”: Issue Practice Groups (“IPGs”) for domestic issues and International Practice Networks (“IPNs”) for international issues. Agents and managers at all levels are encouraged to contact these resource groups for guidance on unfamiliar or complex technical issues.

The Tiered Issue Process was established primarily to ensure consistent treatment of certain high-profile issues. Foreign Tax Credit Generators, Research Tax Credit Claims, and Backdated Stock Options are all examples of Tiered Issues. The IRS has replaced the Tiered Issue Process in an effort to “[balance] the need for consistency with the recognition that there is no “one size fits all” approach to examining and resolving issues.”

The L&BI withdrawal from the Tiered Issue approach is comprehensive. All Tier I, II, and III issues are no longer tiered. All guidance for these issues should no longer be consulted or followed, including Industry Director Directives (“IDDs”). References to Tiered Issues in the Internal Revenue Manual, Coordinated Issue Papers, or Industry Guides, are no longer valid.

Taxpayers currently defending a Tiered Issue at any stage of controversy should reference this guidance.

Read the release here:

Schedule UTP: The Early Returns Are In

IRS Deputy Commissioner Stephen Miller announced the results of the first Schedule UTP filings as part of his remarks to the Tax Executives Institute on March 26, 2012. The audience included corporate tax professionals from a wide variety of companies many of whom had to file a Schedule UTP with their 2010 return. The size of the companies included the largest taxpayers subject to LB&I scrutiny, those in the coordinated industry case (CIC) program as well as many industry case (IC) taxpayers.

1,900 total taxpayers filed a Schedule UTP with their 2010 return. IC taxpayers filed 79% of those tax returns. That is, companies large enough to be subject to the Schedule UTP filing requirement but not large enough to participate in LB&I’s CIC program. An estimated 53% of all schedule UTP returns filed included only one or zero uncertain tax positions. Returns filed by CIC taxpayers averaged 3.1 uncertain tax positions per schedule while returns filed by IC taxpayers averaged 1.9 positions.

Approximately 4,000 issues were disclosed and about 19% of all issues disclosed dealt with transfer pricing issues. The top three code sections involved were Internal Revenue Code section 41 (research credits), 482 (transfer pricing) and 162 (trade or business expenses).

Of the 4,000 concise descriptions reviewed, the overwhelming majority described the tax position and nature of the issue in a way that satisfied the IRS. However, the centralized review process determined that about 3% of taxpayers failed to satisfy the concise description requirement. The IRS issued “soft letters” to the taxpayers whose descriptions were deemed inadequate advising them of the need to comply with the instructions.

The IRS has stated that it will not require further action from taxpayers with regard to the 2010 Schedule UTP. However, the IRS also made it clear that the small number of taxpayers whose returns included inadequate concise descriptions will have their 2011 return reviewed.

Read the Deputy Commissioner’s comments here:
Remarks of Steven T. Miller, IRS Deputy Commissioner, Service and Enforcement, Before the Tax Executives Institute, Mid-Year Conference

New York Raises Rates on Highest Earners

The New York State Legislature, following the lead of Governor Andrew Coumo, may have toppled the domino in the trend to tax higher income earners at higher rates. The two agreed to a measure to increase state income tax rates to 8.82% on those reporting more than $2 million of annual income. Read the New York Times coverage here.

High net worth individuals have been under increased scrutiny by the IRS since the rebranding and reorganization of the Large & Mid Sized Business examination division over a year ago into Large Business & International. Notably the new LB&I organization increased the IRS’s emphasis on the activities of high net worth taxpayers here and abroad. (See the “Wealth Squad” IDR we shared here a few months ago).

Now the talk of increasing rates on America’s highest earners that started with Warren Buffett and William Gates, Sr has found another advocate in the governor and lawmakers of the great state of New York. Whether this is an effect of the Occupy Wall Street movement, a budget necessity or a true compromise as suggested by members of both political parties in the New York General Assembly, the result is higher taxes for the wealthiest New Yorkers and most likely and increased scrutiny of how much they pay.

See the IRS LB&I Division’s New Wealth Squad IDR

All tax trials begin with a redetermination of tax, either by the taxpayer in a refund case, or by the government following an examination.

In the case of the latter, the primary tool of a revenue agent conducting an audit is the Information Document Request, IRS Form 4564. The recently reorganized Large Business & International division of the Internal Revenue Service has put together a team to target the activities of high net worth individuals.

In an effort that falls a bit short of being clever, the team calls itself “the Wealth Squad.” They already have started issuing IDRs like the one here to high net worth taxpayers.