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By Ronald Fink
New rules that the Internal Revenue Service has proposed regarding potential liabilities from uncertain tax positions that are reflected in companies' reports to investors will impose a greater compliance burden than the IRS says they will, attorneys wrote in a letter to the service earlier this week.
The new rules, which are scheduled to take effect next year, will require companies to disclose to the IRS their estimate of the maximum liability that could result from such positions, based on what they report to investors under an accounting rule enacted recently by the Financial Accounting Standards Board, known as Financial Interpretation No. 48.
Earlier this year, IRS Commissioner Doug Schulman told companies that the new rules would reduce the time and effort that the service must spend in examining companies' returns for purposes of compliance with the tax code. And the lawyers say IRS officials have recently stated publicly that the rules wouldn't require companies to do any more work than FIN 48 already requires.
But when the IRS recently spelled out how companies would have to comply, the rules turned out to require companies to estimate what their likely maximum tax liability from such positions would be even when they don't set aside reserves for such positions under FIN 48 or other FASB rules.
Those FASB rules provide considerable leeway for companies to decide whether a reserve is necessary, the lawyers contend. So requiring companies to compute their maximum tax liability from such positions for the purpose, required on a form known as Schedule UTP, even when no reserve has been established, will necessarily impose a much more significant compliance burden than companies currently face.
"We believe the requirement that taxpayers disclose issues for which no reserve is recorded would be unduly burdensome for taxpayers and is inconsistent with the policy behind the proposed adoption of the Schedule UTP," attorneys from the Washington, DC, law firm of Miller & Chevalier, which specializes in federal taxes, wrote in a letter to the IRS dated June 1.
The Miller & Chevalier lawyers observed that IRS personnel have made public comments noting that completing the schedule will not place new information gathering requirements on taxpayers. But, they wrote, "this can only be the case if the Schedule UTP 'piggy backs' off the work that the taxpayer has already performed for financial reporting purposes."
The lawyers noted that companies normally do not calculate their potential tax liability from an uncertain position when they do not set aside reserves reflecting it for financial reporting purposes. So they insisted that reporting of tax positions for which no reserve is required under FIN 48 or other FASB rules "necessarily lays an additional, and in some cases substantial, obligation on taxpayers and is therefore inconsistent with stated policy objectives."
The attorneys also said that the proposed IRS approach to uncertain positions involving transfer pricing and valuation should be changed. The lawyers noted the IRS usually already gets the information on transfer pricing it needs when it examines a company. And they said that the ranking items in order of materiality based on valuation could be "misleading."
In addition, the Miller & Chevalier attorneys said that deductions that the IRS normally does not question should not be included in calculating the maximum tax liability that would result from an uncertain position. The lawyers complained that this would impose an "extreme" burden on taxpayers since their accounting systems normally don't keep track of such amounts.
Finally, the lawyers asked that the rules' effective date be postponed by a year to give companies another year to prepare for them.
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