(Today our guest blogger is J. Richard Harvey, Jr., Distinguished Professor of Practice, Villanova School of Law and Graduate Tax Program. Dick is a terrific colleague of Les and me. Dick worked as the Senior Advisor to the IRS Commissioner Shulman before coming to Villanova and was instrumental in creating the Schedule UTP regime. He has followed it closely since its creation and today offers his observations on the statistics just released. The UTP requirement obviously has significant impact on tax procedure issues for corporate taxpayers who should disclose. Dick suggests a possible change to IRS guidance as a means of improving the Schedule UTP reporting system.)
When Schedule UTP was announced in January 2010 corporate taxpayers and their advisers were apoplectic over the thought that corporations would need to disclose uncertain tax positions (UTPs) to the IRS. It is now 4 years later and it is interesting to note that on February 4th the IRS updated its Schedule UTP filing statistics for the 2012 tax year. Key statistics are as follows:
| 2012 | 2011 | 2010 | |
| Sch. UTP filers | 1,743 | 2,190 | 2,143 |
| UTPs reported: |
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| New UTPs | 2,897 | 4.802 | 4,882 |
| Prior year’s positions reported in Part II | 1,269 | 1,178 | n/a |
| Total tax positions reported | 4,166 | 5,980 | 4,882 |
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| Average UTPs per filer | 2.4 | 2.6 | 2.4 |
Although these statistics are preliminary and only reflect Schedule UTP filings through December 31, 2013, the major question is why have the number of Schedule UTP filers decreased in 2012? This is especially perplexing given that the filing threshold for Schedule UTP decreased from corporations with over $100 million of assets in 2010 and 2011 to those with at least $50 million of assets in 2012. Thus, one would have expected the number of filers to have increased, not decreased.
Explanations could include:
- Corporations are taking less aggressive tax positions and therefore there is less need to report UTPs
- Corporations are figuring out ways to avoid Schedule UTP disclosures
- The statistics are preliminary and they may be adjusted upwards, especially for fiscal year filers
There is likely some truth in all three explanations, but it would be interesting to know which explanation is the main cause of the decrease in Schedule UTP filers. From a tax administrative perspective, the IRS should be hoping it is that corporations are taking less aggressive tax positions.
However, there is a distinct possibility that corporations are figuring out ways to minimize Schedule UTP disclosures. For a comprehensive discussion of some of the approaches that can be used, see my Tax Notes article on the topic. As summarized in the conclusion to that article, there are at least three steps the IRS should take to limit the opportunities for corporations to avoid disclosure of a UTP:
- Make the Schedule UTP instructions very clear that a UTP must be disclosed if the corporation records a reserve for a UTP. Currently the instructions refer to a reserve being “required” which allows corporations to argue that a reserve was not “required” because it was immaterial.
- Require disclosure of a UTP when a tax reserve is not recorded, but the external auditor posts an adjustment to a net effects schedule (or schedules that serve a similar purpose).
- Modify the “expect to litigate provision” to require disclosure if there is a 50% or greater probability of litigation. Currently the standard is greater than 50% which allows corporations to assume there is a 50/50 probability of litigation and still avoid disclosure.
And finally, the IRS should modify its policy of restraint surrounding tax accrual workpapers (TAWs) to effectively provide a penalty for failing to file Schedule UTP properly. Currently the beneficial impact of the IRS’s policy of restraint is not tied in any way to a corporation adequately completing Schedule UTP.
Thus, the IRS should announce that if a corporation adequately files its Schedule UTP, the IRS will not pursue the corporation’s TAWs for issues disclosed on Schedule UTP. This would provide a powerful incentive for corporate Tax Directors to disclose UTPs.