IRS Proposes Greater Transparency on Uncertain Tax Positions

Companies may be required to reveal more details on uncertain tax positions if the Internal Revenue Service (IRS) has its way.
 
The IRS in January proposed changes that would require companies to provide more complete information regarding their uncertain tax positions earlier in the auditing process.  If implemented, the requirements would affect corporations with assets of more than $10 million that file financial results using U.S. generally accepted accounting principles (GAAP). 

IRS Commissioner Doug Shulman commented on the proposed changes during a presentation to the New York Bar Association at its annual meeting, noting that the “goals of our proposal are simple; to cut down the time it takes to find issues and complete an audit, ensure that both the IRS and taxpayer spend time discussing the law as it applies to their facts, rather than looking for information, and to help us prioritize selection of issues and taxpayers for examination.”

The proposal aims to improve tax compliance and administration by filling holes in the much weaker accounting disclosure rule, FIN 48, the provisions of which are now contained in Accounting Standards Codification Topic 740.  Where this rule only required companies to report the aggregate reserve amount to be reported on the income statement, the proposed changes will require that companies itemize or describe the position in detail.

If approved, affected taxpayers would be required to annually disclose uncertain tax positions in the form of a concise description, generally accepted as a few sentences that inform the IRS of the nature of the issue, and the maximum amount of U.S. income tax exposure if the taxpayer’s position is not sustained.  It does not require that the taxpayer disclose their risk assessment or tax reserve amounts.

“We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions,” said Shulman.

Transparency has long been a concern regarding tax issues — one that the IRS has continually looked to remedy.  This proposal intends to do just that, while also creating a more efficient process for all parties involved.

The IRS noted that this proposal would not add substantial new work or burden on taxpayers since they are already required to establish tax reserves for uncertain positions in determining their financial statement income under U.S. or foreign accounting standards.

“The work is already being done,” noted Shulman.  “We are asking for more transparency.”

As part of a continual dialogue regarding the changes, the IRS is looking for public comment, discussion and debate on the issue.  The proposed changes will be out for public comment until March 29.
 

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