The AICPA is concerned that management judgment that determines whether or not to establish a financial statement reserve for a particular tax position may be influenced by the Service’s proposal to require disclosure of tax positions for which a financial statement reserve is recorded. To avoid such an outcome, we recommend that the Service consider basing criteria for disclosure solely on the technical merits of the tax position and not on whether the company has recorded a financial statement reserve.
We understand that this proposal would not change the underlying rules for financial reporting, but believe overlaying a tax disclosure construct on the financial reporting system introduces a dynamic which could work at cross purposes with the original and fundamental purpose of the financial reporting rules. The importance of reliable, transparent financial reporting should not be compromised as part of this IRS tax disclosure initiative. Basing disclosure solely on the technical merits of the position avoids this potential and allows the Service to focus its resources without affecting company decisions over which tax positions are reserved for financial statement purposes.
Basing disclosure on technical merits is also more compatible with the Service’s stated commitment to its policy of restraint as it would clearly separate the Schedule UTP disclosure requirements from the more nuanced decisions made for financial reporting purposes and documented in the tax accrual workpapers. We believe requiring disclosure of positions based on the merits rather than on financial reporting will result in companies identifying the types of uncertain positions which the IRS says it needs to have in order to better achieve certainty, consistency and efficiency.
We believe that such an approach, when taken together with the Service’s other initiatives, including the Schedule M-3, Form 8886 for Reportable Transactions, Form 5471, and the vast array of other e-filed information reports, will enable the Service to efficiently focus on companies’ riskiest tax positions without all of the burden that will otherwise be associated with the proposal outlined in Announcement 2010-9.
While the UTP proposal is based on the premise that taxpayers will merely transfer data from the financial statement to the new Schedule UTP, the actual process will be more complicated and burdensome. For some tax positions, the amount of the maximum tax adjustment is not readily available. The measurement process for accounting purposes often focuses on the expected tax benefit that is more likely than not to be sustained. If one outcome is more likely than not to be reached upon settlement, identifying all possible outcomes may not be relevant. While the draft instructions address some of the burdens and uncertainties in calculating the maximum tax adjustment, it still requires a new set of calculations beyond the calculations performed for financial statement purposes.