Schedule UTP: Another Taxpayer Transparency Requirement

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Since 2002, the Internal Revenue Service (IRS) and financial statement initiatives have increased the number and detail of disclosures that must be made by large corporate taxpayers. The recently released final Schedule UTP requires large corporate taxpayers to disclose information about their uncertain tax positions. This adds yet another required disclosure, one which has implications for the IRS’s historic “policy of restraint” regarding taxpayers’ analysis and judgment concerning their tax positions as reflected in their tax accrual workpapers.

Tax Accrual Workpapers and the Policy of Restraint

Historically, the IRS has applied a policy of restraint with respect to tax accrual workpapers, which are developed by a taxpayer and its auditor and support the tax reserve provision on a taxpayer’s financial statements. In an early decision, the U.S. Court of Appeals for the Fifth Circuit upheld an IRS demand for a taxpayer’s tax accrual workpapers, holding that the workpapers were not protected by the attorney-client privilege or the work product doctrine. See United States v. El Paso Co., 682 F.2d 530, 534 n.3 (5th Cir. 1982).

Two years later, the U.S. Supreme Court held in Arthur Young v. United States, 465 U.S. 805 (1984), that the IRS had the right to demand the taxpayer’s accountant’s workpapers. Due to concerns regarding the impact of the Arthur Young decision on the integrity of the financial statement audit process, the IRS announced shortly thereafter that it would not request tax accrual workpapers except in certain limited circumstances. Because tax accrual workpapers provide a roadmap to the taxpayer’s judgment on its tax positions, routine IRS requests for such workpapers created unease regarding the taxpayer’s willingness to be forthright with its auditor about its tax position. Between 1984 and 2002, the IRS requested tax accrual workpapers in only a handful of cases.

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