IRS Form 1120 Schedule UTP Filing Requirements

The IRS recently announced that Schedule UTP must be filed with Forms 1120, 1120-F, 1120-L or 1120-PC, if an entity meets certain requirements. UTP stands for “Uncertain Tax Positions”, and the purpose of the schedule is for corporate taxpayers to provide concise disclosure of uncertain tax issues relating to the reporting of reserves in their audited financial statements.

Filing Requirements

Schedule UTP will affect more and more corporate taxpayers through a gradual phase-in period. For tax years 2010-2011, corporations that file Forms 1120, 1120-F (foreign companies), 1120-L (life insurance companies) or 1120-PC (property and casualty insurance companies), have uncertain tax positions and possess total assets exceeding $100 million, must file Schedule UTP. For Form 1120-F filers, worldwide assets are used to determine whether a corporation must also file Schedule UTP.

Beginning with the tax year 2012, the total asset threshold will be reduced to $50 million. Starting in tax year 2014, the threshold will be further reduced to $10 million. Currently, tax positions taken before 2010 need not be reported on Schedule UTP.

The IRS has stated that these requirements may also be extended to additional entities, such as tax-exempt organizations, real estate investment trusts, regulated investment companies, and pass-through entities (S corporations, partnerships, and limited liability companies).

While Schedule UTP requires the reporting of U.S. Federal income tax positions, reporting of uncertain foreign or state tax positions is not required.

Reporting of a tax position is required on Schedule once a reserve for a tax position has been recorded on the financial statements, and a position is taken on the Federal tax returns.

Reporting Reserves

Schedule UTP requires reporting of uncertain Federal income tax positions for which a corporation or related party has recorded a reserve in its audited financial statements under applicable financial accounting standards (corporations, however, only report their own tax positions on the schedule, and not the tax positions of a related party). Reserves may include, for example, reported contingent legal liabilities, reductions of an Income Tax Refund Receivable, or increases in a liability for Income Taxes Payable.

Additionally, a corporation must report tax positions taken for which no reserve was established because of an expectation of litigation. If no reserve was established for income tax, Schedule UTP will also be required if a corporation or related party determines that there is less than a 50% chance that the IRS will settle, and it is “more likely than not” that the corporation will prevail in litigation.

However, corporations are not required to report in instances where no reserve was created because the tax position was sufficiently certain, or where applicable financial accounting standards determined that the item was immaterial.

Major Tax Positions

Corporations filing Schedule UTP must also identify “major tax positions” (MTP’s). MTP’s, including transfer pricing positions, which exceed greater than or equal to 10% of the overall tax liability (calculated by dividing the amount of the MTP by the sum of all tax positions, excluding positions expected to be litigated) must be reported.

Purpose of Schedule UTP

Schedule UTP is intended to provide the IRS with a concise disclosure of the uncertain tax issues taken by a corporate taxpayer. The description should be limited to no more than a few sentences and should state the relevant facts involved. Further, Schedule UTP instructions specify that the brief description should not include legal analysis of the tax position taken.

The IRS will treat an entity as having filed Form 8275 (Disclosure Statement) or Form 8275-R by filing a complete and accurately disclosed tax position on Schedule UTP; additionally the Internal Revenue Code (IRC) section 6662(i) disclosure requirements will be satisfied with proper disclosure on the schedule.

Penalties

Schedule UTP instructions currently do not specify a penalty structure. However, the IRS has noted that in instances where it appears that corporations are non-compliant with Schedule UTP requirements, it will bring an appropriate enforcement action.

In the upcoming years, it is clear that Schedule UTP will need to be filed by an increasing number of corporations, raising compliance costs and the complexity of tax planning and preparation. Corporations that have, or expect to have total assets of $10 Million or more (and possibly tax-exempt organizations, depending upon future IRS interpretations), should prepare in advance for complying with this new form. Sherayzen Law Office can help you plan for this eventuality.

Contact Sherayzen Law Office NOW To Prepare For New Schedule UTP Requirements

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Corporate compliance and tax planning necessitates an experienced understanding of complex regulations, IRC statutes, and case law, and IRS penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your corporate, cross-border, international, and other tax needs. Call now at (612) 790-7024 for a consultation today.