IRS Demands Taxpayers' 'Help' In Applying Complex Internal Revenue Code

On January 26, 2010, the Internal Revenue Service ("IRS") published Announcement 2010-9 (the "Announcement") addressing proposed reporting requirements with respect to uncertain tax positions of certain business taxpayers. According to the Announcement, the IRS is in the process of developing a schedule – to be filed with the annual U.S. federal income tax return – on which certain business taxpayers will be required to disclose their uncertain tax positions affecting their U.S. federal income tax liability. The proposed effective date for the new schedule is for returns filed after its release. The IRS will also issue proposed regulations and is seeking public comments. The new schedule was announced yesterday by IRS Commissioner Douglas Schulman at a luncheon meeting of the New York State Bar Tax Section in New York City. Schulman started his remarks with discussing the complexity of the tax law and gradually progressed towards arguing in favor of more taxpayer transparency regarding material tax issues in order to help the IRS.

According to the Announcement, the IRS is proposing that every business taxpayer with total assets in excess of $10 million that has one or more "uncertain tax positions" will be required to file the new schedule with its annual U.S. federal income tax return. "Uncertain tax positions" include positions for which (i) a tax reserve under FIN 48 or other accounting standards must be established, or (ii) the taxpayer or a related entity has not established a tax reserve because the taxpayer (a) expects to litigate the position, or (b) has determined that the IRS has a general administrative practice not to examine the position.

The new schedule will require the taxpayer to include a concise description of each uncertain tax position and the maximum amount of potential U.S. federal tax liability attributable to each uncertain tax position. The concise description must include the rationale for the position taken by the taxpayer and a general statement of the reasons why the position is an uncertain tax position. In particular, the description must include the following:

The Internal Revenue Code sections implicated by the position; The taxable year(s) to which the position relates; Whether the position involves an item of income, gain, loss, deduction, or credit; Whether the position involves a permanent inclusion or exclusion of any item and/or the timing of that item; Whether the position involves a determination of...