Exempt Organizations Advisory - Proposed Disclosure of Uncertain Tax Positions; IRS Invites Comments on Tax-Exempt Entities

Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com) 

On March 5, 2010, the Internal Revenue Service (“IRS”) stated in Announcement 2010-17 that it is extending to June 1, 2010 the comment period on its recent proposal (described in Announcement 2010-9) to require certain taxpayers to report information regarding uncertain tax positions. The IRS also stated that it has received comments asking for clarification of the proposal’s application to tax-exempt entities and specifically invited comments on “what type of uncertain tax positions should be reported” by tax-exempt entities.  

According to Announcement 2010-9, the new IRS initiative would apply to any “business” taxpayer with total assets of $10 million or more that has an “uncertain tax position.” An uncertain tax position includes a position for which the taxpayer or a related entity must establish a reserve under FIN 48 or other accounting standards, or any position relating to the determination of US tax liability for which the taxpayer or a related entity has not recorded a reserve because the taxpayer expects to litigate the position or because the taxpayer “has determined that the Service has a general administrative practice not to examine the position.” According to Announcement 2010-9, affected taxpayers include “a taxpayer who prepares financial statements, or is included in the financial statements of a related entity that prepares financial statements, if that taxpayer or related entity determines its United States federal income tax reserves under FIN 48, or other accounting standards relating to uncertain tax positions involving United States federal income tax.” Announcement 2010-9 did not specifically address the proposal’s application to tax-exempt entities.

The IRS stated in Announcement 2010-9 that it is developing a schedule that affected taxpayers will be required to file with their tax returns. According to the IRS, the schedule will require a concise description of each uncertain tax position, the rationale for such position, a general statement of the reasons for determining that the position is uncertain, and the maximum amount of potential federal tax liability attributable to each uncertain tax position. In order to be considered sufficient, the description will require: (1) the Internal Revenue Code sections potentially implicated by the position; (2) the taxable year or years to which the position relates; (3) a statement that the position involves an item of income, gain, loss, deduction, or credit against tax; (4) a statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both; (5) a statement whether the position involves a determination of the value of any property or right; and (6) a statement whether the position involves a computation of basis. 

In Announcement 2010-17, the IRS stated that it plans to release a draft schedule and draft instructions in early April 2010 and that it “expects the draft schedule and instructions will clarify some of the issues that have already been brought to the Service’s attention, provide additional information concerning the proposal described in Announcement 2010-9, and facilitate comment on the proposal.” 

The IRS plans to require affected taxpayers to submit the new schedule with returns relating to the calendar year 2010 and for fiscal years that begin in 2010. The IRS is evaluating options for penalties or sanctions that could be imposed if a taxpayer fails to make adequate disclosure of the required information.