March 05, 2007
The Financial Accounting Standards Board ("FASB") met January 17, 2007 and voted not to defer the effective date of FASB Financial Interpretation No. 48, Accounting for Uncertainty in Tax Positions ("FIN 48").
Accordingly, taxpayers with calendar year audited financial statements must comply with FIN 48's requirements effective as of January 1, 2007. The general effective date of FIN 48 is for fiscal years beginning after December 15, 2006.
FIN 48 requires that uncertain tax positions be evaluated when preparing statements prepared in accordance with generally accepted accounting principles ("GAAP") and the tax benefit of any such position (including the decision not to file a return) may be recognized for financial statement purposes only if it is more likely than not that the position (and its financial statement benefit) would be sustained, if audited by taxing authorities and the taxpayer appeals the dispute to the courts.
Once this threshold is met, then the financial statement benefit must be measured by assigning probabilities to possible outcomes.
This is a much more stringent reporting environment for recognition of tax benefits on financial statements than under prior accounting pronouncements.
Facts and Issues You Should Consider:
- Tax accrual workpapers generally are not privileged and may be discovered in litigation by a state or the Internal Revenue Service. See United States v. Arthur Young & Co., 465 U.S. 805 (1984) in which the Supreme Court held that tax accrual workpapers are relevant in a tax examination and the IRS can issue a summons to obtain them under I.R.C. Section 7602. Although the IRS has a policy of restraint in this regard, requesting tax accrual workpapers only when listed transactions, or similar transactions, are involved, there is no assurance that this policy of restraint will continue. States may or may not follow this policy.
- The IRS has filed a summons enforcement action for all of Textron, Inc.'s workpapers for the 2001 taxable year which is currently in litigation.
- The specificity required by FIN 48 will likely provide a roadmap to any taxing authority as to uncertain tax positions. Careful consideration must be given to what is provided to the auditor in this regard.
- Taxpayers should discuss with their auditor his or her approach to implementation of FIN 48 and the level of support the auditor will require for uncertain tax positions before disclosing any of such positions.
- Under certain circumstances, a privilege may be retained with respect to legal advice rendered with respect to a tax position which may be litigated. Your attorney can assist in evaluating tax positions and serving as a buffer with the auditor under appropriate circumstances to retain a bona fide basis to assert privilege as to these positions.
- FIN 48 requires that "the cumulative effect of applying the provisions of this interpretation shall be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year, presented separately"
- Accordingly, the impact, if any, will be recognized on the January 1, 2007 GAAP balance sheet of the entity with appropriate adjustments thereafter.
- This may have an impact on meeting loan covenants which are based on GAAP financial statement ratios.
IRS Circular 230 Disclosure: To ensure compliance with IRS requirements, we inform you that this update is not intended to be U.S. federal tax advice and is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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