Key takeaways

In response to a 2018 Treasury Inspector General for Tax Administration (TIGTA) report, the IRS proposed expanding the information that taxpayers would be required to report on Schedule UTP, including:

• Requiring taxpayers to identify a broad list of "contrary authority" to the position taken on a tax return.
• Requiring taxpayers to identify the relevant line for the position on the underlying tax return and the "Maximum Tax Amount" (MTA) for the position.
• In addition, the Instructions provide that, if a taxpayer is required to file both Schedule UTP and Form 8275 or 8275-R, filing a Schedule UTP is deemed to satisfy the requirement to file the Form 8275/8275-R.

Background

Schedule UTP was first introduced by the IRS in 2010. It is filed by large corporations with audited financial statements to report uncertain tax positions on their annual income tax returns. Schedule UTP generally requires any federal tax position, for current or prior tax years, to be reported if the corporation (or an affiliate) has recorded a reserve in its audited financial statements for unrecognized tax benefits for a position taken on the return, or the corporation recognized tax benefits for such uncertain tax position because the corporation expects to litigate the position. On the current Schedule UTP, taxpayers are required to provide the primary Code section, identify whether the position is permanent or temporary, identify major tax positions, rank uncertain tax positions by size, and provide a concise (yet thorough) description of the tax position.

When Schedule UTP was first introduced, the IRS stated that the form was needed to gain access to more complete information earlier in the process regarding the nature and materiality of a taxpayer's uncertain tax positions. Schedule UTP was somewhat controversial when it was first released, and numerous commenters filed public comments expressing concern that the Schedule UTP asked for information that was privileged or otherwise protected from disclosure. Ultimately, the IRS engaged with the private sector when it drafted the initial Schedule UTP—to balance the information sought in the form with the IRS's long-standing "policy of restraint," which (among other things) prevents the IRS from requesting the incremental dollar amount of each uncertain tax position.

In 2018, TIGTA examined whether the IRS had incorporated the Schedule UTP into the audit process, and whether the Schedule UTP improved return selection and audit results. TIGTA reported that about twenty revenue agents that it polled found the current Schedule UTP to be "not useful". Based on averaging responses with respect to 2010 through 2015 tax year examinations, 81% of respondents said the examination issue reported on the Schedule UTP would have been selected for examination without the Schedule UTP. As a result, TIGTA recommended that the Service either modify Schedule UTP to "include information needed to be useful for its intended purpose" or abandon the form. The Service agreed to modify Schedule UTP in response to the report, but does not seem to have seriously considered TIGTA's recommendation to abandon the form.

Draft schedule UTP

The Draft Schedule UTP contains two significant changes that are described further below: a requirement to identify all "contrary authority" to the taxpayer's uncertain position that is being reported and a requirement to report the "maximum tax adjustment" for each uncertain position that is being reported on the form.

Reporting contrary authority

The prior version of Schedule UTP requires taxpayers to identify court decisions, regulations, and guidance published in the Internal Revenue Bulletin. The Draft Schedule UTP requires taxpayers to identify "contrary authority," which the Instructions define as Revenue Procedure, Revenue Ruling, Private Letter Rulings, Technical Advice Memorandum, Notice, Court Decision, Chief Counsel Advice, Field Service Advice, and General Counsel Memorandum. With the exception of court decisions, regulations, and guidance published in the Internal Revenue Bulletin (Revenue Procedures, Revenue Rulings, and Notices), taxpayers may be surprised to see these items categorized as "authority," since these other items are written determinations limited by their terms to their specific facts and cannot be relied upon by other taxpayers or the IRS in other cases. Moreover, other than cases, regulations, Revenue Procedures, Revenue Rulings, and Notices, taxpayers generally cannot rely on these types of documents for penalty protection according to sections 6111 and 6112. Finally, we note that, with the exception of regulations and guidance published in the Internal Revenue Bulletin, the types of guidance identified in the Instructions are not subject to Treasury review. Rather, such items are subject to a significantly truncated review process within IRS Chief Counsel only.

Reporting maximum tax adjustment

The draft Schedule UTP would require taxpayers to report their MTA, which the Instructions describe as the "amount of the unrecognized federal income tax benefits." There is no equivalent requirement on the current Schedule UTP. Many observers have expressed concern that this proposed requirement could be interpreted to mean that taxpayers should determine the amount of additional tax that would be owed if the taxpayer's position were disallowed by a court. IRS officials have publicly stated that, instead, the MTA is intended to be the amount reported on the relevant line on the taxpayer's return but, without clarification in the final instructions, there may be significant uncertainty as to how taxpayers are supposed to complete the form.

If taxpayers' concerns about determining the amount of additional tax that could be owed are valid, then the proposed requirement to report the MTA may create perverse incentives for audit selection by encouraging the IRS to focus on the amount purportedly at risk, rather than the merits of the issue, when selecting issues for exam. The proposed requirement would certainly impinge on the Service's policy of restraint, which is described in the Internal Revenue Manual and prevents the IRS from requesting the incremental dollar amount of each uncertain tax position or other information that may be legally protected (attorney work product, section 7525, or otherwise). See Internal Revenue Manual Section 4.10.20.3.Typically, the IRS would revise its policy of restraint by issuing an LB&I Memorandum or revising the relevant section of the Internal Revenue Manual, rather than through issuing instructions to a form.

Coordination with Form 8275 and 8275-R

There are several other disclosure obligations that taxpayers are subject to, including Form 8275 (Disclosure Statement), Form 8275-R (Regulation Disclosure Statement), and Form 8886 (Reportable Transaction Disclosure Statement). The IRS has made efforts to coordinate reporting requirements between Schedule UTP and Forms 8275 and 8275-R by providing that a properly filed Schedule UTP meets the requirement for filing Form 8275 or 8275-R. This approach will reduce the filing burdens for taxpayers as well as the administrative processing burden for the IRS. Once the Draft Schedule UTP is finalized, it is expected that the IRS will revise the Instructions for Forms 8275 and 8275-R. 

Conclusion

Stakeholders that were interested in submitting comments on the Draft Schedule UTP were required to do so by 18 November 2022. Many comment letters were submitted that were critical of the Draft Schedule UTP[, including a comment letter submitted jointly by Baker McKenzie and KPMG]. The IRS has not announced when it intends to issue a final Schedule UTP.