Uncertain Tax Positions (UTPs) are upon us this 2014 Christmas season and they are coming your way. What are UTPs? UTPs are deductions or “tax positions” on your tax return that have a 50% chance or more of being disallowed by the Government during an IRS audit. So how do you determine if you have UTPs? The IRS website gives plenty of assistance to large corporations who. have their army of tax attorney staffers on payroll. But the smaller privately held business owners with assets just over $10 Million and audited financial statements are most likely going to discuss which UTPs must be disclosed with their in house or independent tax counsel. Are communications with your tax attorney regarding UTPs protected from IRS discovery? If you are concerned about losing the privilege, please stay tuned to TaxView with Chris Moss CPA to learn how to protect your confidential communications to your attorney as you complete Form 1120 Schedule UTP for 2014.
UTPs were first created by the Financial Accounting Standards Board (FASB) in draft form in 2005 and officially adopted in 2006 by FIN 48, interpreting FASB Statement 109 Accounting for Uncertainty in Income Taxes. Starting in 2014 the Government now requires in accordance with IRS Regulations 1.6012-2(a)(4) and 2014 UTP Instructions the reporting of UTPs on Form 1120 Schedule UTP if your business has $10 Million or more in assets and your financial statements have been or will be audited by an independent CPA firm who has expressed an opinion in accordance with GAAP. Moreover, my view is that eventually, perhaps as early as 2017, the IRS will expand the UTP initiative to include S Corporations, Partnerships and even someday individuals.
After you identify your UTPs, you then provide the IRS a “concise description” of all your UTPs. Finally you determine which of these UTPs require disclosure on your tax return. You then simply list required “concise descriptions” to be disclosed on Form 1120 Schedule UTP for 2014 as part of your annual corporate income tax return filing.. Check out the IRS UTP Resource Page. From this page we can click to Uncertain Tax Positions Schedule UTP. Remember, in order to determine which concise descriptions are required to be disclosed you need to first decide which of your tax positions have more than or less than a 50% chance of being sustained by the Government. If you are confused on how to do this read on.
A more likely than not standard of 50% is called a legal burden of proof. In a criminal case as you all know the burden is “beyond a reasonable doubt” which approaches almost a 99% chance of success. However for a tax position to have more than a 50% chance of success, existing law must be first applied to your unique facts and evidence that support the preparation of your tax return. Once the law is applied to those facts, you must more likely than not be able to persuade the US Tax Court to sustain your UTP. How many business owners can chose which UTPs will be sustained by the US Tax Court under these conditions without the assistance of a tax attorney? Will UTP disclosures from you to your tax attorney be confidential, safe and privileged communications?
Doug Shulman, former IRS Commissioner in prepared 2010 remarks to the American Bar Association meeting in Toronto Canada said: “The final instructions make it clear that a taxpayer need only disclose information to her attorney sufficient to identify the issue and the relevant facts.” Heather Maloy, Large Business and International Division Deputy Commissionerwrote in 2011 to her staff that the IRS recognizes a “Policy of Restraint” regarding privileged communications and documents. Former IRS acting Commissioner from 2012-2013 Steven Miller commented in 2012 before the Tax Executives Institute that out of “4,000 concise descriptions filed prior to 2012 only 133 failed to satisfy the requirements…further notification will be sent to these taxpayers to ensure that future filings follow these instructions…we intend to let those taxpayers know their future returns will be reviewed.”
Just so you know, the common law attorney client privilege issues surrounding “burdens of proof” and the “concise description” required by UTP federal regulations have not yet been tested in Federal Courts because the UTP program is so new. Lack of UTPs case law notwithstanding, all business owners should be able to freely discuss with their tax attorney how and why UTPs and their concise descriptions in 2014 are going to be listed on Form 1120 Schedule UTP without losing the “attorney client privilege” that attaches to those discussions. My best predication is that the Government, despite IRSPolicy of Restraint Announcement 2010-9, will someday argue as they did in Johnston v IRS US Tax Court (2002), that you waived the attorney client privilege if “you relied on the advice of counsel” to not only create the required concise descriptions, but to include or not include concise descriptions on 2014 Schedule UTP.
The Court in Johnston, citing Hearn v Ray, 68 F.R.D. 574 (E.D. Wash 1975), argues if you assert the privilege you might also lose the privilege if the assertion of attorney client privilege prevents the IRS access to the information needed for the Government to win their case against you. Really? Folks these “concise descriptions” are not just numbers from the accounting department, but they are rather short essay answers you give the Government under penalty of perjury. Would you not want your communications to your tax counsel regarding these “concise descriptions” to be privileged and confidential?
What does all this mean for us? First if your business balance sheet shows assets over $10 Million, and your financial statements were audited by an independent CPA firm in 2014, review your year-end UTPs with a tax expert as soon as possible to create a draft Form 1120 Schedule UTP. Make sure any notes of discussions you had with your tax attorney are marked Confidential Attorney Client Privilege protected communications. Second make sure you understand that whatever you say, text, email or voice mail to anyone who is not an attorney will absolutely not be privileged during an IRS audit of Schedule UTP, particularly with regard to your concise descriptions. Finally learn about your UTPS. The more you know about UTPs unique to your business the more likely you will preserve your attorney client privilege and bullet proof your tax return from adverse IRS audit consequences for many years to come. Thanks for joining us on TaxView with Chris Moss CPA.
See you all next time on TaxView.
Kindest regards and Merry Christmas to all.
Chris Moss CPA