Uncertain Tax Positions

Question 1

What is an uncertain tax position? (Not likely tested on the CPA Exam)

Answer 1

Tax strategies that may or may not be sustainable (acceptable) under an audit by the IRS.

Question 2

What impacts do tax strategies have the financial statements?

Answer 2

Tax strategy impacts the tax liability and if there is uncertainty as to the benefit of the deduction, the liability is understated.

1. Benefit is recognized ONLY if it is more likely than not that the position is sustainable. If it is likely that it will be sustained, then you reduce the liability account.
2. Have to accrue a second liability for the uncertain deduction. For any portion of the uncertain deduction that is later allowed, income tax expense is reduced that year.

Question 3

Example: Assume taxable income is $60,000 and the tax rate is 30%. An uncertain deduction of $10,000 is included in taxable income. There is greater than 50% chance the deduction will be sustained.

Answer 3

(Look at slides for this to make sense)–

$7,000 is used because it exceeds the 50% (probability)

$10,000 deduction reduces income tax payable by $3000 (10,000 X .30)

7,000 is used to reduce income tax expense (7,000 X .30)= $2,100

Additional liability (3000X.30) = $900

Journal Entry:
Income Tax Payable $10,000
Income Tax Expense ( $2,100 )
Liability- Uncertain tax benefit ( 900 )