Avoid Uncertain Tax Position Disclosures of Timing Differences by Filing a Request for Change in Accounting Method
Financial statement filers whose financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) are likely familiar with the terms “FIN 48” or “Uncertain Tax Positions.” Adoption of FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (now known as ASC 740-10 or FIN 48) was required for most public companies in years beginning after December 15, 2006. Privately owned entities were required to adopt the standard in years beginning after December 15, 2008. FIN 48 essentially prevents entities from recording income tax benefits in their financial statements for tax return positions taken that do not meet a more likely than not standard of being upheld by the relevant tax authority. In addition, FIN 48 requires entities to disclose Uncertain Tax Positions and their effects on the financial statements. This article informs corporate taxpayers with FIN 48 reserves related to timing differences of an opportunity that may affect both their financial statements and corporate income tax returns.
Starting with 2010 tax returns, the Internal Revenue Service began requiring certain corporations to file a new form called Schedule UTP Uncertain Tax Position Statement. The form is required for an applicable corporation: (1) taking a tax position on its U.S. federal income tax return for the current year or for a prior tax year, and (2) either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position. A tax position for which a reserve was recorded (or for which no reserve was recorded because of an expectation to litigate) must be reported regardless of whether the audited financial statements are prepared based on U. S. GAAP, International Financial Reporting Standards (IFRS), or other country-specific accounting standards.
For years 2010 and 2011, only corporations meeting the above requirements and having assets equal to or greater than $100 million were required to file Schedule UTP. For years 2012 and 2013, the asset threshold is lowered for applicable corporations with assets equal to, or greater than, $50 million, and for years 2014 and forward the threshold is further reduced to $10 million.
For corporations using an impermissible method of accounting for income tax purposes, one of the long-standing benefits of filing for a change in accounting method is “audit protection.” This means that as long as the change in accounting method is filed with the IRS before the improper method is discovered during an IRS examination, the IRS will not require the taxpayer to change its method of accounting for the item in any year prior to the year of change, thus avoiding interest and penalties. An additional benefit of changing from an improper method to a proper method of accounting is that it eliminates the need for any FIN 48 reserves on the financial statements.
With the lower threshold for Schedule UTP filing of $50 million for 2012, corporations potentially subject to the Schedule UTP filing requirement have an opportunity not only to receive audit protection and avoid financial statement disclosure of FIN 48 reserves; they also have an opportunity to avoid filing Schedule UTP with their 2012 corporate income tax return.
Changes in accounting method generally fall into two categories: automatic and non-automatic. Automatic changes receive automatic IRS consent and can be filed as late as the extended due date of the return for the year of change. So for example, a calendar-year corporation wishing to make an automatic accounting method change for the year 2012, has until the extended due of September 15, 2013 to file Form 3115 with its 2012 corporate income tax return. This assumes of course that the 2012 return is actually extended.
Non-automatic changes must be filed by the end of the year for which the change is requested. Thus, a corporation that wishes to make a non-automatic accounting method change for the year 2012 has until December 31, 2012 to file Form 3115.
Applicable corporate taxpayers potentially subject to filing Schedule UTP with their 2012 corporate income tax returns have an opportunity to avoid that obligation, but they need to act with a sense of urgency. Not only can they avoid filing the form, they can obtain audit protection and perhaps avoid financial statement disclosure of uncertain tax positions.