The expanding scope of UTP reporting is significant. According to some tax experts, filing this schedule may increase the chance that your company will be audited.

A little background

Although it may seem counterintuitive, some companies take positions on their tax returns that they’re not sure will be upheld. Perhaps the guidance available is ambiguous or it’s unclear if the tax regulations apply to the business’s specific situation. For example, a company may claim a research tax credit, yet not be completely confident that their rationale for taking the credit will hold up. Indeed, research credits have accounted for the largest percentage of UTPs reported, according to IRS statistics.

Some definitions can also help in understanding uncertain tax positions. The IRS defines a UTP as a position taken on a tax return for which the corporation or a related party has recorded a reserve in its audited financial statements. A UTP also refers to instances in which a company hasn’t recorded a reserve for the position because it expects to litigate it. And a “tax position” is a position taken on a return that, if not sustained, would lead to an adjustment either in a line item on the return, or a schedule or form attached to it.

While the IRS began requiring organizations to report UTPs in 2010, the framework was laid in 2006. That’s when the Financial Accounting Standards Board issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Prior to this, businesses had different ways of accounting for uncertain tax positions in their financial reports. That could result in inconsistencies between statements.

Asking corporations to identify their UTPs is intended to cut the time that the IRS requires to review returns. That can help both the agency and taxpayers.

How to address reporting

As of their 2014 returns, corporations must file Form UTP if they meet several criteria — for example, if the corporation files Form 1120 or one of its offshoots; has assets of at least $10 million; issues audited financial statements or is included in others’ audited statements; and has one or more tax positions that must be reported. The reporting requirements apply whether the audited statements are prepared based on GAAP, IFRS, other country-specific accounting standards or a modified version of one of these. Form UTP is attached to the company’s income tax return.

Businesses must include a “concise description” of their UTPs on Schedule UTP. The IRS has issued guidance as to what it will — and won’t — consider a concise description. A statement such as “this is a research credit issue” typically won’t cut it. The IRS has provided an example of an acceptable description: “The taxpayer incurred support department costs that were allocated to various research projects based on a methodology the taxpayer considers reasonable. The issue is whether the taxpayer’s method of allocating costs is acceptable by the IRS.”

Businesses don’t need to report the amount of the tax adjustments that could apply if the IRS prevails in any dispute about their positions. However, they do need to rank the positions, based on the size of the reserve recorded for it. Companies must identify as “major tax positions” those that account for at least 10% of all the tax positions in their financial statements.

Confused? Work with a pro

The regulations around UTPs are complicated. So, work with your tax advisor. They can provide additional information and guidance.

Sidebar: When you don’t need a Schedule UTP

No Schedule UTP is needed if the company didn’t establish reserves on its financial statements either because the amount would be immaterial, or its tax positions were “sufficiently certain,” so no reserves were required. Similarly, companies typically aren’t required to report tax positions from prior years if they reported them on previous Schedules UTP. This doesn’t apply, however, if a transaction results in the company taking tax positions on multiple returns.

Companies that prefer to avoid the entire issue of uncertain tax positions should consider several options that could help them gain certainty regarding any tax questions. One is a private letter ruling. This is a statement issued by the IRS for a fee in response to a taxpayer’s request for clarification. Essentially, the letter interprets and applies tax laws to the taxpayer’s situation. It can be used when a taxpayer wants confirmation with the IRS that a prospective transaction won’t result in a tax violation.

The Pre-filing Agreements Program offers taxpayers a way to ask the IRS to consider an issue before they file their tax returns. The intent is to resolve potential disputes earlier, rather than later.

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