The IRS announced today that it is contemplating dramatic steps to increase the transparency of corporate tax returns. In Announcement 2010-9, the IRS proposed a disclosure regime under which all taxpayers with financial statements prepared under FIN 48 (or other financial accounting standards that relate to uncertain U.S. tax positions) and assets over $10 million would be required to disclose on a new tax-return schedule:

• A concise description of each uncertain tax position for which the taxpayer has recorded a reserve in its financial statement and 
• For each disclosed position, the maximum potential federal tax liability (determined without regard to the taxpayer's assessment of its likelihood of prevailing on the position).

The Announcement also states that

uncertain tax positions will include any position related to the determination of United States federal income tax liability for which a taxpayer or related entity has not recorded a tax reserve because (i) the taxpayer expects to litigate the position, or (ii) the taxpayer has determined that the Service has a general administrative practice not to examine the position.

The proposed regime would not require taxpayers to disclose their risk assessments for disclosed positions or their tax reserve amounts. As currently contemplated, the concise description will include the rationale for the position and a concise general statement of the reasons for determining that the position is an uncertain tax position. It is the IRS's position that this proposed regime and schedule does not reverse its longstanding policy of restraint in requesting tax accrual workpapers.

As proposed, the schedule will also require each concise description of an uncertain position to include:

• The Code sections implicated by the position; 
• The tax year or years to which the position relates; 
• Whether the position involves an item of income, gain, loss, deduction, or credit; 
• Whether the position involves the permanent inclusion or exclusion of an item and the timing of that item; 
• Whether the position involves the valuation of any property or right; and 
• Whether the position involves a computation of basis.

The IRS intends to require that the new schedule be filed with any returns filed after release of the schedule. The Announcement states that the IRS may seek legislation imposing a penalty for failure to file the schedule or make adequate disclosure.

Commissioner Doug Shulman outlined this new regime at a lunch presentation before the New York State Bar Association's Tax Section today. The proposed disclosure regime stems from the IRS's concern that its traditional audit procedures and available audit resources are insufficient for examining the increasingly complex and global transactions corporations now report on tax returns. The proposed disclosure regime reflects conversations taking place in the Compliance Assurance Program between Tax Directors and IRS Exam Teams about those transactions and the methods for examining the resulting tax positions. Commissioner Shulman indicated that the IRS seeks to balance the challenges it faces in examining corporate returns with corporate concerns about confidentiality and privilege.

The IRS anticipates publishing a notice of proposed rulemaking regarding this new regime and schedule. The IRS is soliciting comments from corporate taxpayers and their representatives. The Announcement expressly solicits comments on several issues, including how the maximum tax adjustment should be reflected on the schedule and whether there are alternative methods for enabling the IRS to discern the relative importance of uncertain tax positions. This comment period is open until March 29, 2010.

We encourage you to join us in carefully thinking through the effects that this proposed regime would have on your tax returns and audits. The proposal raises manifold questions about its potential implications:

• How will Exam Teams use the information disclosed on the new schedule? Will audit plans now include all disclosed positions? If so, what are the implications for the IRS's currency initiative? 
• How will disclosure of uncertain positions on current returns affect prior years that are still under audit or at Appeals where the IRS did not audit the uncertain position? What about years for which the audit is closed but for which the statute of limitations on assessment remains open? 
• With this proposal, has the IRS successfully sidestepped the work-product issues at the crux of the Textron case? Or are there potential work-product-based challenges to the disclosures required on the proposed schedule?

For further information, please contact any of the following lawyers:

Lawrence Gibbs, lgibbs@milchev.com, 202-626-6005

Kevin Kenworthy, kkenworthy@milchev.com, 202-626-5848

Patricia Sweeney, psweeney@milchev.com, 202-626-5926

Don Rocen

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