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Step 1: Recognition – First, identify the tax positions and determine whether, due to their technical merits, it is more than 50% likely that the positions will be maintained after review by the tax authorities. Suppose your organization is audited by authorities that have all the relevant information about the position. The FASB Illustrative Guidelines for the Application of FIN 48 provide an example with the Research Tax Credit, which shows the analysis required to enter a tax item for financial statement purposes (FIN 48, Appendix A, ¶A5). In the example, the taxpayer determines that a unit of account is any project that constitutes qualified research for the loan. When analyzing projects, it is found that a project`s activities may not meet the legal definition of research and therefore may not meet the MLTN standard required to maintain the tax benefits associated with the project. Therefore, the taxpayer may realize a tax benefit in its financial statements for activities that meet the MLTN standard, but not for the activity that may not meet the standard. ASC 740 requires businesses to incur interest charges for underpaying taxes if the full benefit of a tax situation is not recognized in the financial statements and if interest on insufficient income tax payments must be paid under tax laws. If the underpayment of taxes is subject to tax penalties, these should also apply during the reporting period in which the company claims or is expected to claim the position in the tax return. Bloomberg Tax Portfolio 5002, Accounting for Income Taxes: Uncertain Tax Positions, provides a comprehensive analysis of the treatment of uncertain tax positions as part of the FASB`s accounting standards codification. Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, published in June 2006 (and now in Topic 740 of the FASB Accounting Standards Codification), has been in effect for publicly trade reporting companies since 2007. According to Fin 48, a reporting entity must identify all of its open tax positions and determine whether it is more likely that each tax position can be maintained because of its technical merits. If this is the case, the company must calculate the portion of the tax benefit levied on the return that can be reported in the financial statements.

This is done according to the measurement system provided for in the interpretation. For open tax positions that do not comply with the MLTN (More Likely Than No) standard, the company may not declare any benefit of the position unless and until the uncertain position is resolved in favor of the taxpayer or the limitation period for this matter expires. The new UTP in the IRS annex, Uncertain Tax Position Statement, which reports on uncertain tax positions, has been interpreted as requiring corporate taxpayers to disclose their FIN 48 positions. While this thesis is not entirely correct, it has certainly caused concern among corporate taxpayers. When preparing for the disclosure of uncertain tax positions in Schedule UTP, it is important to understand the differences between the reporting of financial statements and the disclosure of the federal income tax return. Companies must add a “concise description” of their UTPs on the UTP calendar. The IRS has issued guidance on what it will and will not consider a concise description. A statement like “This is a research credit problem” will usually not suffice. The IRS provided an example of an acceptable description: “The taxpayer incurred costs for the support service allocated to various research projects based on a methodology he deems appropriate.

The question is whether the taxpayer`s cost allocation method is accepted by the IRS. “This portfolio provides a comprehensive analysis of the interpretation of FASB No. 48, which deals with the recognition of uncertainties in income taxes recognised in an entity`s financial statements. 15.3 Recognition of Benefits from Uncertain Tax Positions Excerpt from the FASB Main Glossary – Tax Position Corporations are not required to report the amount of tax adjustments that could be incurred if the IRS prevails in a dispute over their positions. However, you need to classify the positions according to the size of the reserve captured for them. Companies must identify as “major tax items” those that represent at least 10% of all tax positions in their financial statements. For taxation years beginning in 2014 and later, the asset threshold for reporting uncertain tax positions on Schedule UTP (Form 1120) has fallen to $10 million. Companies that meet all other requirements for listing in Schedule UTP must file a UTP SCHEDULE if total assets reach or exceed $10 million. This lowering of the asset threshold for the 2014 taxation year is the final phase of the five-year phase of the Reporting Requirement in Schedule UTP. The asset threshold for the 2010 and 2011 taxation years was $100 million and fell to $50 million for the 2012 and 2013 taxation years.

Since the IRS requires the reporting of your FIN 48 footnotes to Appendix D of Form 990, you can expect all UTPs to be targeted in an audit. Your financial advisor can help you ensure that you have the proper documentation to withstand a review of these positions. Governments around the world are in debt and looking for additional tax revenue. This involves accounting for uncertain tax positions in accordance with ASC 740. We encourage companies and their auditors to familiarize themselves with this important accounting topic. What is an uncertain tax situation and how do you account for it under U.S. GAAP? As governments around the world struggle for tax revenue, this issue has come to light. This article summarizes the accounting for uncertain tax items under ASC 740 using a quickly modified example. Last year, the IRS proposed that the new UTP Schedule with tax returns for the 2010 calendar year be filed by taxpayers completing Form 1120, U.S. Corporate Income Tax Return; 1120-PC, U.S. Property and Casualty Insurance Companies Tax Return; 1120-L, U.S. Life Insurance Companies Income Tax Return; and 1120-E, U.S.

Income Tax Return of a Foreign Corporation, if the L-list balance sheets on these forms show total assets of $100 million or more (T.D. 9510; Announcement 2010-75). (There are transitional rules that lower the total asset threshold for filing 2014 tax returns to $10 million.) The IRS Guidelines for Annex UTP do not explicitly define what constitutes an uncertain tax situation. Instead, the IRS refers to “a tax situation relating to a particular federal tax return for which a taxpayer must reserve an amount under FIN 48” (Announcement 2010-9). Schedule UTP requires taxpayers to list uncertain tax positions, but the schedule is very different from fin 48 disclosure for financial statements. When preparing annual financial statements, FIN 48 requires an entity to review each tax item (divided into units of account) and analyze whether the item complies with mlTN. The company`s analysis is reviewed by the company`s auditors before the financial statements can be certified. The MLTN standard also applies to previous tax positions, which can be adjusted after the limitation period.

Video – Income Taxes: Uncertain, Fundamental Tax Positions The crucial question is whether the organization recognizes too many tax benefits based on the tax positions it takes on the tax returns of unrelated companies. The UTP Annex requires taxpayers to provide the relevant sections of the Internal Revenue Code associated with the uncertain tax situation and also requires a “concise description” of the tax situation, including a description of the relevant facts. Taxpayers must list “uncertain tax positions” by ranking items in order of size (based on the actual amounts of tax reserves for each uncertain tax situation), but they are not required to disclose the amount of potential tax liability associated with the uncertain tax situation. In 2010, Annex UTP takes into account only the elements of the calendar year 2010 and not the uncertain tax elements in the previously filed returns. If a tax position is not considered more likely than not maintained solely on the basis of its technical merits, no benefit of the position is recognised in the financial statements. If a tax position reaches the probability threshold, it must be measured according to the greatest benefit achieved with a probability of more than 50%.. .

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