IRS Releases 2012 Schedule UTP Filing Statistics

irs-sealThe IRS recently released Schedule UTP filing statistics for the 2012 tax year. The statistics are not complete as returns from some late fiscal year filers and others still have not been processed.  The Schedule UTP filing statistics include updated totals for the 2011 tax year, originally reported here.

As of December 2013, the IRS was able to report the following:

  • 1,743 taxpayers filed Schedule UTP with their 2012 returns.
  • 4,166 uncertain tax positions were reported for 2012, down from 5,980 in 2011.
  • The percentage of taxpayers who filed Schedule UTP in multiple years was 55% for the 2012 tax year, down from 77% in 2011.
  • The average number of uncertain tax positions per taxpayer was 2.4 in 2012.
  • 42% of Schedule UTP returns included only one uncertain tax position
  • 55% of taxpayers filing Schedule UTP in 2012 were publicly traded companies.
  • The most frequently reported code sections underlying uncertain tax positions for 2012 were
    • § 41 Research Credit (22%),
    • § 482 Transfer Pricing (19%), and
    • § 263 Capitalization (4%).

Here are the 2012 IRS UTP Filing Statistics 2012
Read more about Schedule UTP here.

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.

IRS Issues Guidance for Schedule UTP Concise Descriptions

The IRS revised the Instructions for Schedule UTP in early February but one thing that it did not change was the definition of the concise description required to accompany each uncertain tax position. The IRS later publicly expressed concerns over the small number of taxpayers (about 133) who offered inadequate concise descriptions on the Schedule UTP attached to their 2010 returns. On May 11, the IRS addressed this issue by publishing specific guidance for preparing concise descriptions on the 2011 Schedule UTP.

Schedule UTP instructs a taxpayer to draft a concise description as follows:

Provide a concise description of the tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the IRS of the identity of the tax position and the nature of the issue. In most cases, the description should not exceed a few sentences. Stating that a concise description is “Available upon Request” is not an adequate description.

The new IRS guidance offers five examples of hypothetical concise descriptions that rather clearly do not meet the requirements of the instructions. One such example is,

This is an issue for which we have recorded of reserve because the appropriate tax treatment of this position is unsettled and we are awaiting published guidance and we are awaiting the outcome of pending litigation.

The other examples of clearly insufficient descriptions indicate that the issue is under audit or that the item is subject IRS scrutiny. The IRS notes that descriptions like this are inadequate because they do not provide relevant facts affecting the tax treatment of the item nor do they identify the tax position and the nature of the issue.

Of greater instruction for most practitioners, are the four examples in this guidance that clearly identify the tax issue but still still fall short of the IRS standard for a proper concise description. The second set of examples compare specific hypothetical concise descriptions for the same tax position, one of which is insufficient and one of which is sufficient.

The first of these examples uses the following insufficient concise description:

This is a research credit issue.

The guidance suggests the following is a better description of a potential research credit issue:

The taxpayer incurred support department costs that were allocated to various research projects based upon the methodology the taxpayer considers reasonable. The issue is whether the taxpayer’s method of allocating these costs is acceptable by the IRS.

Another example starts with the following insufficient description:

The taxpayer claimed a domestic production activities deduction. The domestic production activities deduction is highly factual and subject to review by the IRS.

The guidance indicates that a sufficient concise description for a domestic production activities deduction would read as follows:

The taxpayer claimed the domestic production activities deduction on certain production activities income for 2010. The issue is whether costs incurred for product aging processes that occur in designated areas located at the taxpayer’s distribution facility are considered manufacturing or production costs of the tangible personal property, and therefore, a component of Qualified Production Activities Income.

These guidelines will be helpful to determine the scope and extent of the necessary concise description as practitioners consider their Schedule UTP disclosures for 2011.

Read the complete IRS guidance here:
Schedule UTP Guidance for Preparing Concise Descriptions

The Taxman Cometh: IRS Announces Plans to Focus Audit Resources on Middle Market Companies

In a recent speech at the mid-year conference of the Tax Executives Institute, IRS Deputy Commissioner Steven T. Miller laid out the framework for the future of IRS corporate audits. To borrow Mr. Miller’s own assessment, this is bad news for large corporate taxpayers in the CIC (Coordinated Industry Case) program (i.e., the IRS is not going away) and it is also bad news for so-called middle market companies because they will be the new focus of the Internal Revenue Service’s audit scrutiny.

The new strategy Mr. Miller announced will use existing programs geared at CIC taxpayers, such as the IIR (Industry Issue Resolution) program, CAP (Compliance Assurance Process) and Schedule UTP (Uncertain Tax Positions), to increase transparency among large companies and thereby reduce the resources required to examine those companies. The strategy is to take revenue agents currently assigned to large corporations (those with over $1 billion in assets) and redeploy them to auditing taxpayers with revenues or assets between $10 million and $250 million. Miller went on to outline in some detail the steps the IRS will be taking to accomplish this new mission.

There are a number of takeaways here. At least three changes can be expected immediately. The incremental changes that large corporate taxpayers have been experiencing in recent years will continue. The IRS will expect more information, sooner, and more quickly. Mr. Miller was clear. If information requested in an IDR (Information Document Request) is not forthcoming, the IRS Summons power will be used to enforce revenue agent’s demands. Second, the IRS intends to bring its influence to bear upon the Office of Appeals. The IRS will request that Appeals Officers return cases to exam where new facts or arguments are raised for the first time in an Appeals Conference. This signals a further encroachment on the autonomy of an Appeals function that is already restricted in its consideration of coordinated issues, tiered issues and issues of interest. Third, The importance of Schedule UTP will only grow as the IRS reviews and refines its use of this tool to encourage taxpayer disclosures. Mr. Miller noted that those taxpayers who provided inadequate concise descriptions of positions on their 2010 Schedule UTP will be contacted by the IRS and should expect to have future returns reviewed.

The changes will not all be immediate however. The IRS is a large vessel and it cannot turn on a dime. However, once this ship changes course, as it appears it has committed to do, then the impact on the middle market will be significant. Mr. Miller mentioned a focus on companies with operations and assets of less than $250 million but there are still a number of companies in the $250 million to $1 billion range that also should expect to see increased audit activity. These likely will be the first companies to face new IRS examinations if only because they have already filed at least one Schedule UTP giving the IRS a good starting point. Once those companies with less than $100 million in assets are required to include a Schedule UTP with their Form 1120 (beginning in 2012 for those with $50 million in assets), many more corporate taxpayers can expect to hear from revenue agents wanting to open multi-year audits. The new direction is not limited to middle market corporate filers. Mr. Miller also made it clear that the new direction for LB&I will include an emphasis on pass through entities and financial products. Change is on the horizon.

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

IRS Updates Instructions for Schedule UTP

Every tax trial begins with a tax position that at least one party (often the government) thinks is uncertain. It isn’t much of a stretch to suggest that future tax trials will have some relationship to an uncertain tax position once reported on Schedule UTP. Accordingly, we hope to keep you up to date with changes affecting this form currently required of corporate taxpayers with assets of $100 million or more, but which will come to include taxpayers with as little as $10 million in assets by 2014.

On February 3, the IRS revised the instructions for Schedule UTP, applicable to returns for the 2011 tax year. Notable changes include the treatment of changing members in a consolidated group, reserves affected by changed circumstances, the treatment of interest and penalties, and specific references to FIN 48 (which presumably should be read as ASC 740 for those familiar with the FASB codification).

One significant change in the instructions for schedule UTP in 2011 is the treatment of new and old members of a consolidated group. A new instruction advises:

If, after a subsidiary member leaves the consolidated group, the subsidiary, or a related party of the subsidiary, records a reserve in an audited financial statement with respect to one of the subsidiary’s tax positions in its former group’s prior return, the subsidiary should report the tax position on Part II of the Schedule UTP filed with its 2011 tax return, if it files a separate return. If the subsidiary is included in the return of another consolidated group that is required to file Schedule UTP, the common parent of that consolidated group should report the tax position on Part II of the Schedule UTP filed with its 2011 tax return.

A new example in the instructions, Example 11, explains how to record the uncertain tax position of a party subject to a corporate merger.

On June 30, 2011, MergerCo merges into AcquiringCo in a transaction in which AcquiringCo survives. MergerCo’s tax year ends on that date. After the merger, AcquiringCo records a reserve with respect to a tax position that is taken on MergerCo’s final return in its audited financial statements. That tax position must be reported on Part I of the Schedule UTP filed with MergerCo’s 2011 tax return even though the reserve was recorded by AcquiringCo. AcquiringCo should not report the tax position on the Schedule UTP filed with its 2011 tax return because MergerCo’s final return is a prior year tax return on which the tax position was reported.

Two new examples explain how to record tax positions that are new or revised because of changed circumstances. The first example, Example 2, addresses the treatment of a tax position a corporation reported on an earlier year return and determined was reasonably certain (i.e., not reported on Schedule UTP) but is then questioned by the IRS under examination. If the Corporation reevaluates the tax position and records a reserve for that prior year position in 2013, the corporation must report the tax position on the schedule UTP filed with its 2013 tax return even if the IRS identifies the tax position for examination prior to the recording of the reserve.

The second example addressing changed facts considers positions disclosed because of an expectation to litigate. New Example 5 instructs:

A corporation takes a position on its 2011 tax return for which no reserve is recorded because the corporation determines the tax position is correct. Circumstances change, and in 2013 the corporation determines that the tax position is uncertain, but does not record a reserve because of its expectation to litigate the position. That is, the Corporation or a related party determines the probability of settling with the IRS to be less than 50% and, under applicable accounting standards, no reserve was recorded because the corporation intends to litigate the tax position and has determined that it is more likely than not to prevail on the merits of the litigation. The corporation must report that position on Part II of the Schedule UTP filed with the 2013 tax return either if it records a reserve or if it does not record a reserve because it expects to litigate, even if that decision to record or not record occurs because of a change in circumstances in a later year.

Finally, the 2011 instructions offer new guidance on the treatment of interest and penalties when reporting tax positions on schedule UTP. A Corporation is not required to report accruals of interest on the tax reserve recorded with respect to a tax position taken on a pre-2010 tax return. Also, with regard to determining size and ranking of tax positions, if interest or penalties relating to the position is not separately identified in the books and records as associated with the position, the net amount of interest and penalties is not included in the size of a tax position used to rank the position or compute whether the position is a major tax position.

Read the new instructions here:
2011 Schedule UTP Instructions