A Pinch of Salt, May 2010- State Tax Issues Resulting From IRS Announcement 2010-9


The new IRS policy that requires taxpayers to disclose uncertain tax positions (UTPs) is getting some well-deserved attention. On April 19 the IRS issued a draft form Uncertain Tax Position Statement (Schedule UTP) for comment by June 1. Some tax professionals question the necessity or fundamental fairness of requiring taxpayers to report UTPs, while others question the specifics of the proposed reporting requirement, such as the materiality threshold, the requirement to provide a brief statement of the UTP, and the quantification of the UTP.

In this installment of A Pinch of SALT, we explore some state and local tax issues resulting from the new IRS policy. Because state and local tax presents unique financial statement challenges, there are a number of questions to consider in anticipating how the proposed disclosure will affect state taxation. Those questions include:

• What information must be reported on Schedule UTP?

• How will a state obtain Schedule UTP?

• How much of Schedule UTP is a state entitled to?

• What will states do with Schedule UTP?

• How might a taxpayer use Schedule UTP to its advantage?

• What if a state required a state-tax-specific Schedule UTP?

We evaluate those questions with a particular focus on taxpayer concerns that confidential information may be disclosed to states that may not have the authority or need to obtain that information.

What Information Must Be Reported on Schedule UTP?

Based on the IRS guidance and the draft Schedule UTP, a taxpayer must provide the required disclosure if the taxpayer either prepares financial statements for or is included in the financial statements of a related entity and has assets that exceed $10 million. An affiliated group of corporations filing a federal consolidated return will file one Schedule UTP for the affiliated group. Although a single Schedule UTP for a federal affiliated group may present its own set of challenges,5 it will create significant additional concerns at the state and local level, where taxpayers often file as part of a different group of related entities.

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Eversheds Sutherland (US) LLP on:

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