IRS Announces Game-Changer: Announcement 2010-9 Proposes To Modify IRS Policy Of Restraint

The IRS proposes to require business taxpayers to disclose their "uncertain tax positions" on a new schedule to be attached to their federal tax returns.

Perhaps in anticipation of the Supreme Court of the United States granting Textron's petition for certiorari, the Internal Revenue Service (IRS) is proposing once again to modify its "Policy of Restraint" with respect to a taxpayer's tax accrual workpapers. In Announcement 2010-9, the IRS announced that it proposes to require business taxpayers to disclose their "uncertain tax positions" on a new schedule to be attached to their federal tax returns. The IRS is also evaluating whether to seek legislation to impose a penalty for failure to file the schedule or to make adequate disclosure. Finally, the Announcement seeks comments on the proposal described in the Announcement, which must be filed by March 29, 2010.

The Announcement proposes to require a business taxpayer or related entity to annually disclose its uncertain tax positions by providing a concise description of each uncertain tax position for which the taxpayer or a related entity has recorded a reserve on its financial statements. To be sufficient, the description must contain the following:

The Code sections potentially implicated by the position

A description of the taxable year or years to which the position relates

A statement that the position involves an item of income, gain, loss, deduction, or credit against tax

A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both

A statement whether the position involves a determination of the value of any property or right

A statement whether the position involves a computation of basis.

In addition, the schedule would require the disclosure of the maximum amount of potential federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer's risk analysis regarding its likelihood of prevailing on the merits).

IRS Commissioner Shulman, in his January 26, 2010, comments to the New York State Bar Association Tax Section, declared that the "proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts."

FIN 48 establishes a threshold for recognizing the benefits of a tax return position in a company's financial statement as "more likely than not" (MLTN) to be sustained by the taxing authority. Moreover, FIN 48 imposes an ongoing obligation...