107 STUDY GUIDE SUBSTANTIATION AND DISCLOSURE OF TAX POSITIONS

Question 1

4132.01

Answer 1

Question 2

TAX POSITION

Answer 2

A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.

FASB ASC 740-10-20

Question 3

4132.02

Answer 3

Question 4

4132.03

Answer 4

Substantiation of charitable contributions

• For cash contributions, a deduction is only allowed if the taxpayer has written receipts such as a canceled check or a written statement from the charity that show:
  1. the name of the charity and
  2. the date and amount of the contribution.
• A written statement must provide an estimate of the value of any goods or services received by the donor if:
  1. a payment is made to the charity for more than $75 and
  2. the payment is partly a charitable contribution and partly a payment for goods and services.
• For gifts of property other than money, the taxpayer must have a receipt from the charity. If the property is clothing or other household items, the property must in “good used condition or better.”
• To deduct a single cash or noncash property contribution of $250 or more, the taxpayer must receive a written acknowledgment from the charity. The acknowledgment must include:
  1. the amount of cash received or a description of the noncash property contributed,
  2. whether or not the charity provided the donor any goods or services for the contribution, and
  3. a description and estimate of the value of any goods or services that were provided.
• If the taxpayer donates noncash gifts valued at more than $500, additional substantiation must be provided with the taxpayer’s return. This includes:
  1. how the property was acquired and
  2. the taxpayer’s basis in the property.
• If a taxpayer makes a noncash contribution that exceeds $5,000 in value, a qualified appraisal regarding the value of the property may also be required.
• If a taxpayer donates a used car to a charity, the taxpayer must obtain a statement from the charity stating the sales price of the car in cases where the car is sold by the charity. The amount that the charity receives from selling the car generally is the amount that the taxpayer can deduct for contributing the car to the charity.

Question 5

4132.04

Answer 5

Required disclosure of tax return positions (in general)

• In IRS Schedule UTP, certain companies are required to disclose specific information regarding uncertain tax positions taken on their tax return.
• Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return if the following two conditions are met:
  1. The corporation has taken a tax position on its federal income tax return for the current tax year or a prior tax year.
  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 meeting one of the two above criteria must be reported regardless of whether the audited financial statements are prepared based on U.S. generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above.
• A tax position taken on a tax return is a tax position that would result in an adjustment to a line item on that return if the position is not sustained.
• If multiple tax positions affect a single line item, each tax position must be reported separately on the Schedule UTP.
• Analysis of whether a reserve has been recorded for the purpose of completing Schedule UTP is determined by reference to the reserve decisions made by the corporation or related party for audited financial statement purposes.
• A corporation is not required to report on Schedule UTP, a tax position taken in a tax year beginning before January 1, 2010, even if a reserve is recorded with respect to that tax position in audited financial statements issued in 2010 or later.

Question 6

4132.05

Answer 6

Who must file

• A corporation must file Schedule UTP with its income tax return if:

1. the corporation files IRS Forms
   1120, 1120-L, or 1120-PC,
2. the corporation has assets that equal or exceed $10 million,
3. the corporation or a related party issued audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year,
   and
4. the corporation has one or more tax positions that must be reported on Schedule UTP.

• The Schedule UTP should not be filed
  separately but should be attached to the corporation’s income tax return.

Question 7

4132.06

Answer 7

Policy of restraint

• The IRS has announced that it will use a policy of restraint and forgo seeking certain documents that relate to uncertain tax positions and the workpapers that document the completion of IRS Schedule UTP.
• If a document is otherwise privileged under the attorney-client privilege, the tax advice privilege in IRC Section 7525, or the work product doctrine and the document was provided to an independent auditor as part of an audit of the taxpayer’s financial statements, the IRS will not assert during an examination that privilege has been waived by such disclosure.
• The above will not apply if:
  1. the taxpayer has engaged in any activity or taken any action, other than those described in that paragraph, that would waive the attorney-client privilege, the tax advice privilege in IRC Section 7525, or the work product doctrine; or
  2. a request for tax accrual workpapers is made because unusual circumstances exist, or the taxpayer has claimed the benefits of one or more listed transactions.
• Under current procedures, examiners request tax reconciliation workpapers as a matter of course. The taxpayer may redact the following information from any copies of tax reconciliation workpapers relating to the preparation of Schedule UTP it is asked to produce during an examination:
  1. Working drafts, revisions, or comments concerning the concise description of tax positions reported on Schedule UTP
  2. The amount of any reserve related to a tax position reported on Schedule UTP
  3. Computations determining the ranking of tax positions to be reported on Schedule UTP or the designation of a tax position as a Major Tax Position
• Other than requiring the disclosure of the information on the schedule, the requirement to file Schedule UTP does not affect the policy of restraint.

Question 8

4132.07

Answer 8

Reportable transactions: The United States Congress has enacted a series of income tax laws designed to halt the growth of abusive tax avoidance transactions, including the disclosure of reportable transactions. Each taxpayer that has participated in a reportable transaction and that is required to file a tax return must disclose information for each reportable transaction in which the taxpayer participates.

According to the instructions for IRS Form 8886, reportable transactions include the following:

• Transactions, or substantially similar transactions, identified by the IRS through notice, regulation, or other form of published guidance as a listed transaction
  * Confidential transactions: A confidential transaction is a transaction that is offered to the taxpayer or a related party under conditions of confidentiality and for which the taxpayer or a related party paid an advisor a minimum fee. A transaction is considered to be offered under conditions of confidentiality if the advisor places a limitation on the taxpayer’s disclosure of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of the advisor’s tax strategies.
  * Transactions with contractual protection: This is a transaction for which the taxpayer or a related party has the right to a full refund or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained.
  *** Loss transactions: **A loss transaction is a transaction that results in a taxpayer claiming a loss under IRC Section 165 (a loss due to a non-reimbursed insurance claim).
• **Transactions of interest, **which are similar to transactions that the IRS has identified by notice, regulation, or other form of published guidance as a listed transaction, but for which there is not enough information to determine if the transaction should be identified as a tax avoidance transaction

Question 9

CHATGPT
WHAT IS A SCHEDULE UTP?

Answer 9

IRS Schedule UTP, which stands for “Uncertain Tax Position Statement,” is a reporting requirement for certain taxpayers, specifically corporations that meet specific criteria. The purpose of Schedule UTP is to provide the IRS with information about uncertain tax positions that corporations have taken on their tax returns. An uncertain tax position is a position that a corporation has taken on its tax return that could potentially be challenged by the IRS.

The main requirements and features of IRS Schedule UTP include:

Reporting Uncertain Tax Positions: Corporations that meet the criteria set by the IRS must use Schedule UTP to report any tax positions for which there is uncertainty regarding the tax treatment.

Threshold for Reporting: Schedule UTP is typically required for corporations that have total assets exceeding $10 million and that have audited financial statements. However, specific threshold amounts and criteria may change over time, so it’s essential to consult the most current IRS guidance.

Disclosure of Positions: Corporations must disclose specific details about the uncertain tax positions, including the tax code sections involved, a description of the position, and the maximum amount of tax benefit attributable to each position.

Rank Ordering: Taxpayers are required to rank order their uncertain tax positions based on the amount of potential tax exposure. This means listing the positions from those with the largest potential tax impact to the smallest.

Penalty Protection: By filing Schedule UTP and providing information about uncertain tax positions, corporations may be eligible for certain penalty protection. This means that if the IRS challenges a position that was properly disclosed on Schedule UTP, the taxpayer may not be subject to certain accuracy-related penalties if the position is later found to be incorrect.

Reporting on the Form 1120: Schedule UTP is typically attached to the corporation’s annual income tax return, Form 1120.

Continuous Disclosure: Corporations must continue to report uncertain tax positions on Schedule UTP as long as they meet the reporting criteria. This includes updating the schedule for any changes in positions or new uncertain positions in subsequent tax years.

It’s essential for affected corporations to consult with tax professionals and stay updated on the IRS’s requirements and guidance regarding Schedule UTP to ensure compliance. Failure to comply with the reporting requirements can result in penalties and additional scrutiny from the IRS.