Navigating the tax code — and staying atop the latest tax law developments — can be challenging for business owners. In turn, financial reporting for uncertain tax positions (UTPs), such as pending IRS audits or lawsuits, is complicated and subjective. Here’s some guidance to help clarify matters.
Applying the threshold
Companies that follow U.S. Generally Accepted Accounting Principles (GAAP) must identify, measure and disclose UTPs using a “more-likely-than-not” threshold. In short, tax accruals are booked only for uncertain positions that meet this threshold.
This means that a tax benefit is allowed only if there is a more than 50% likelihood that the position would be sustained if challenged and considered by the highest court in the relevant jurisdiction. Unrecognizable benefits with less than a 50% cumulative chance of sustaining an IRS challenge should be reported on the balance sheet as a separate UTP liability.
Identifying tax positions
When reporting UTPs, companies should presume that returns will be audited and tax authorities will have access to all information. Then, management must identify all material tax positions, including those that:
- Exclude specific income streams from taxable income,
- Assert an equity restructuring is tax-free,
- Refrain from filing a tax return in a particular jurisdiction, or
- Accelerate expense or delay income recognition, such as depreciation or amortization expenses.
When reporting UTPs, management is required to create detailed tabular disclosures and factor into its estimates such costs as accrued interest and penalties. Moreover, unresolved UTPs must be reassessed as of each balance sheet date. Developments such as emerging case law, tax law changes or interactions with taxing authorities could affect tax benefits formerly recognized. In fact, tax reform proposals that Congress plans to introduce in early 2017 could affect UTP estimates for the end of 2016.
Supporting your position
Estimating probabilities and future settlement amounts is a subjective activity and requires the expertise of an experienced CPA. Among the factors an expert will consider are the company’s expected settlement strategy, the nature of the tax liability and applicable tax law precedents. Unsure how to measure and disclose UTPs in today’s uncertain business environment? We are atop the latest proposals and can help you comply with GAAP.
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