Schedule UTP: New Changes And Old Concerns – Transfer Pricing & More Trending News

 

On October 11, 2022, the IRS introduced draft modifications to Schedule
UTP, Uncertain Tax Position Statement.1 These
are the primary materials modifications to Schedule UTP for the reason that IRS first
printed the schedule in 2010. An IRS official claimed the modifications
are vital as a result of “many taxpayer descriptions of unsure
tax positions are inadequate and unhelpful, with some offering
simply two phrases, resembling ‘accrued bonus.'”2
But the modifications might battle with the IRS’s inside coverage of
restraint on tax accrual workpapers and renew outdated considerations about
waiver of privileges. This article summarizes the vital
takeaways from the modifications.

Background

Schedule UTP is utilized by companies to report unsure tax
positions on their annual tax returns.3An unsure tax
place contains any place for which reserves have been
established and documented pursuant to FIN 48 (codified at ASC
740-10), in addition to these positions for which no reserve was
established, however the place the taxpayer expects to litigate the
place with a extra probably than not likelihood of prevailing on the
deserves.4 The IRS first issued Schedule UTP on September
24, 2010, after a interval of public touch upon a draft
schedule.5 In response to the draft schedule, many tax
practitioners argued that Schedule UTP required manufacturing of
privileged and work product data.6The IRS
tried to handle these considerations in two steps.

First, the IRS scaled again the schedule’s necessities
between the draft and remaining variations. The most notable of those
modifications was to slim what’s required to be included within the
“concise description” of unsure tax positions. The
draft directions required companies to incorporate “the
rationale for the place and the explanations for figuring out the
place is unsure.”7 Under the ultimate
directions, companies needed to solely embody “the related
details affecting the tax therapy of the place and knowledge
that moderately may be anticipated to apprise the Service of the
id of the tax place and the character of the
concern.”8An IRS official defined that the modifications
had been meant to clarify that “UTP coverage is just not about
piggybacking on the taxpayers’ work, … nor about getting
taxpayers to put in writing their very own notes of
adjustment.”9

Second, the IRS expanded its coverage of restraint to paperwork
used to organize Schedule UTP. The IRS is of the view that tax
accrual workpapers don’t represent privileged or work product
data, and thus the IRS has the authority to request or
summon such data from companies.10But beneath
its coverage of restraint, the IRS will neither request nor summon
tax accrual workpapers throughout an examination, except uncommon
circumstances apply or the merchandise beneath examination is a listed
transaction.11Thus, the place the coverage of restraint
applies, companies usually are not required to provide arguably
privileged or work product data, and should thereby protect
sure privileges in subsequent litigation. In Announcement
2010-76,12 the IRS clarified that the paperwork used to
put together Schedule UTP can be handled as workpapers which can be given
safety beneath this coverage of restraint.

Proposed Changes to Schedule UTP

The proposed modifications to Schedule UTP considerably develop the
data that should be reported by companies for unsure tax
positions. Corporations should now report the next three
extra classes of data: (1) any IRS steerage or court docket
choice that’s opposite to the taxpayer’s tax place; (2)
the placement of the tax place within the tax return (i.e.,
the road quantity on the related kind or schedule); and (3) the
incremental quantity included on the road associated to the tax
place.13In addition, the revised directions present
enhanced steerage and extra examples on what constitutes an
sufficient disclosure for the “concise description.” To be
thought-about full, the disclosure should now “embody a
description of the related details affecting the tax therapy of
the place and knowledge that may moderately be anticipated to
apprise the IRS of the id of the tax place, its quantity,
unit of account, and the character of the controversy or potential
controversy.”

The directions even recommend {that a} company should embody a
reference to the IRS’s stance on the tax place throughout
examination, with Example 16 being most instructive. Example 16
particularly requires the company to establish the IRS’s
hostile place in a possible switch pricing dispute,
i.e., an elevated royalty quantity leading to an
elevated U.S. tax legal responsibility.15

Insufficient disclosure. The taxpayer
has a licensing settlement with a international subsidiary that’s
supported by a switch pricing examine.

Sufficient concise description.
Pursuant to a licensing settlement, taxpayer transferred know-how
and advertising and marketing intangibles for the manufacturing and sale of Product
Z in Region A to its Country Y subsidiary. The concern is whether or not the
quantity of taxpayer’s royalty earnings for the Region A know-how
and advertising and marketing intangibles for Product Z shall be elevated pursuant
to part 482, thereby growing its U.S. tax legal responsibility.

Issues with the Changes

The draft Schedule UTP might violate the IRS’s coverage of
restraint. In defining tax accrual workpapers, the Internal Revenue
Manual gives that “a request to disclose the existence or
quantity of a tax reserve established for any particular identified or
unknown transaction, nevertheless, is identical as asking for a
description of a portion of the contents of the tax accrual
workpapers.”16 Requiring companies to report the
incremental quantity of every unsure tax place, together with extra
detailed descriptions for every place, appears to represent a
request for a portion of the tax accrual workpapers. Such requests
“are coated by the identical coverage of restraint as requests for
the precise paperwork that make up the tax accrual
workpapers.”17 The IRS is thus, in impact,
requesting tax accrual workpapers by means of Schedule UTP in direct
violation of its’ coverage of restraint.

In addition, disclosure on Schedule UTP might represent waiver
of sure privileges. The IRS’s coverage of restraint solely
extends to IRS examinations. It doesn’t restrict the IRS Chief
Counsel’s workplace or the Department of Justice from arguing
waiver of legal professional-shopper privilege, tax-practitioner privilege, or
the work-product doctrine. Excessive disclosure on Schedule UTP might
waive these privileges as a result of the IRS is each a 3rd-occasion and an
adversarial occasion. Schedule UTP thus locations companies within the
troublesome place of selecting between underreporting on the
schedule, thereby failing to adequately disclose an unsure tax
place, or waiving privilege in subsequent litigation. Either
method, the company loses.

Conclusion

Corporations must totally think about find out how to adjust to the
new reporting necessities as soon as finalized. Excessive disclosure on
Schedule UTP might waive sure privileges for extremely delicate
paperwork. The exhausting work for firms begins now.

Footnotes

1. em>IRS Statement about Uncertain Tax Positions
(UTP) Reporting
,
https://www.irs.gov/newsroom/irs-statement-about-uncertain-tax-positions-utp-reporting.

2. Kristen A. Parillo, Misleading’ Instruction
for Draft Schedule UTP to Be Clarified
, Tax Notes, Nov. 2,
2022.

3. See Treas. Reg. §
1.6012-2(a)(4).

4. See Instructions for Schedule UTP (Form 1120)
(Rev. December 2019).

5. Announcement 2010-75, 2010-41 I.R.B. 428
(September 24, 2010).

6. See e.g., Letter from Thomas M. Susman,
Director of the American Bar Association Governmental Affairs
Office, to the Internal Revenue Service, Re: IRS Proposals
Requiring Disclosure of Uncertain Tax Positions (May 28, 2010), at
2 (The required disclosures “would require taxpayers to
establish data that inherently relies on the recommendation of
counsel and tax preparers and to share the psychological impressions of
their authorized and tax advisers.”).

7. Draft Instructions for Schedule UTP (Form 1120) (April
19, 2010), at 9.

8. Final Instructions for Schedule UTP (Form 1120)
(2010), at 7.

9. Diane Freda, IRS Will Not Seek Privileged
Documents Disclosed to Auditors, Chief Counsel Says
, Bloomberg
Law (Oct. 13, 2010). See additionally United States v. Adlman, 68
F.3d 1495, 1501 (2nd Cir.1995) (The function of the work-product
doctrine is “to ascertain a zone of privateness for strategic
litigation planning and to forestall one occasion from piggybacking on
the adversary’s preparation.”).

10. See Announcement 2002-63, 2002-27
I.R.B. 72 (July 8, 2002).

11. See Internal Revenue Manual § 4.10.20.3
(12-08-2020).

12. 2010-41 I.R.B. 432 (Sept. 24, 2010).

13. See Draft Schedule UTP (Form 1120) (Rev.
December 2022). An IRS official lately clarified that incremental
quantity means the whole quantity on the road, not the unrecognized tax
profit. Kristen A. Parillo, Misleading’ Instruction for
Draft Schedule UTP to Be Clarified
, Tax Notes, Nov. 2, 2022.
“For instance, if a taxpayer reviews a $2 million analysis
credit score on a tax return, of which $1 million is an unrecognized tax
profit, ‘we’re asking for that $2 million that is on
the road of the return.'” Id. The IRS official
said that “we will definitely be clarifying that within the
revised directions.” Id.

14. Draft Instructions for Schedule UTP (Form 1120) (Rev.
December 2022), at 7.

15. Id. at 8.

16. Internal Revenue Manual § 4.10.20.1.1(2)
(07-12-2004).

17. Id.

The content material of this text is meant to offer a common
information to the subject material. Specialist recommendation must be sought
about your particular circumstances.

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