Uncertain Tax Positions

Question 1

What is an uncertain tax position (UTP)?

Answer 1

Those positions that may not be sustainable on audit by the IRS. Examples include Uncertain deductions, tax credits, revenue exemptions

Question 2

When is income tax expense reduced for an uncertain tax position?

Answer 2

Only if it is more likely than not (>50%) that the position will be sustained by the IRS

Question 3

What is the two step approach to determine if the UTP should be included in Income Tax Expense?

Answer 3

1. ) Is the UTP more likely than not to be sustained

2. ) If yes, then a probabilistic approach is applied to determine the amount of benefit in the current year.

Question 4

What if a UTP position is not “More likely than not” that the position will be sustained upon Audit?

Answer 4

Income tax expense is not reduced and an additional liability is recognized. No benefit is recognized in the current year.

Question 5

What if a UTP position is “more likely than not” that the position will be sustained by the IRS?

Answer 5

The firm must estimate specific outcomes of the audit and probabilities associated with each. The amount of benefit recognized is the largest amount for which the cumulative probability of realization exceeds 50%

Question 6

What is the classification of the liability for an unrecognized tax benefit (UTP)?

Answer 6

Based on the period of settlement. Tax cases often require more than one year for resolution, therefore most are classified as noncurrent.