On October 11, 2022, the Internal Revenue Service (“IRS”) announced significant draft changes to Schedule UTP, “Uncertain Tax Position,” and instructions for the 2022 tax year, stating that the changes will “improve the form’s usefulness.”
Background
Schedule UTP is used by corporate taxpayers to report uncertain tax positions on their annual tax returns. Any federal tax positions on the current or prior tax year should be reported if the corporation (or a related party) has recorded a liability for unrecognized tax benefits or the corporation recognized the tax benefit for that tax position because the corporation expects to litigate the position.
On the current Schedule UTP, taxpayers are required for each UTP to provide the primary section of the Internal Revenue Code (“IRC”), whether the position was permanent or temporary, whether it was a major tax position, and its ranking by size as well as a concise description of the tax position, including a description of the relevant facts.
Proposed Changes
The new draft Schedule UTP would further require taxpayers to disclose for each UTP four additional categories of information:
- Any IRS publications (revenue procedure, revenue ruling, private letter ruling, technical advice, etc.) or case law otherwise reportable on Form 8275 when a tax position is contrary to a rule
- Any Treasury regulations that are contrary to the position taken
- The location of the tax position by form or schedule and by line number
- The dollar “amount of the unrecognized federal tax benefits” for each reserve item
Concerns These Changes Raise
In our view, these disclosures go far beyond the original disclosures that taxpayers have been making on Schedule UTP.
These are the first material changes since the IRS first published Schedule UTP and instructions in 2010. These changes bring into question whether the IRS will still maintain its policy of restraint and not request tax accrual workpapers. Taxpayers have not previously been required to disclose a description of the tax uncertainty for each UTP by confessing all of the legal authorities that would support the IRS. While taxpayers have had the option to file a Form 8275 to disclose certain items or positions that were contrary to the IRC or an IRS ruling in order to avoid certain accuracy-related penalties, it was not required that they do so. As recognized by the IRS in the Internal Revenue Manual, this type of analysis is at the crux of tax accrual workpapers. Further, the mandated reporting of the incremental dollar amount of each UTP causes the very same concerns for taxpayers. Internal Revenue Manual 4.10.20 provides:
[a] request to reveal the existence or amount of a tax reserve established for any specific known or unknown transaction, however, is the same as asking for a description of a portion of the contents of the tax accrual workpapers. Requests for a description of the contents of the tax accrual workpapers are covered by the same policy of restraint as requests for the actual documents that make up the tax accrual workpapers.
Requiring taxpayers to report the incremental dollar amount of each UTP, along with confessing the authorities that would support the IRS’s position, is directly contrary to the policy of not asking for such information.
Now Is the Time for Taxpayers to Raise Concerns
It remains to be seen if the IRS will proceed to implement the changes proposed last week. Taxpayers need to comment on the draft Schedule UTP and the continuing need for the IRS to maintain a policy of restraint with regard to tax accrual workpapers. The IRS has invited written comments on the proposed form and its instructions, and it is incumbent on taxpayers to do so. Comments are due by November 18.
