By Phil Karter
As reported earlier this week in the tax press, the recently completed initial filing season for Schedule UTP produced at least one major surprise in the eyes of IRS officials, who had anticipated a much greater number of items listed on the average Schedule UTP than actually materialized. In fact, the IRS’s predictions were off by a wide margin, with the number of disclosed positions of the 1,500 or so Schedule UTPs filed averaging only slightly more than three items per schedule for CIC taxpayers, and less than two items for non-CIC taxpayers. Pre-filing expectations of item disclosures had been many multiples higher, perhaps even reaching as high as 100 or more separately stated positions. Although such predictions may have been wildly optimistic from the IRS’s standpoint, one must now wonder whether the apparent failure of the first filing season to meet the Service’s anticipated disclosure bonanza will hasten efforts to extend the penalty regime to specifically target what are viewed as incomplete or inadequate disclosures on Schedule UTP.
Presently, compliance enforcement for Schedule UTP can be described as somewhat “toothless” given the absence of any specific penalty provision directed toward incomplete disclosures. In fact, even a failure to file the schedule itself is not specifically subject to any penalty, although it has been suggested by some legislators that the failure to file could potentially be brought into the § 6651 penalty regime. (See Letter from Carl Levin, Chairman, Permanent Subcommittee on Investigations to Douglas Shulman, Re: Announcements 2010-9, 2010-17, and 2010-30 Related to Reporting Uncertain Tax Positions (May 21, 2010).) Whether the IRS’ apparent disappointment in the limited number of disclosed items induces a move to urge Congress to implement penalties specific to the new schedule, either through expansion of the scope of § 6651 or otherwise, remains to be seen.
Besides the specter of more targeted penalties, the Service’s recent guidance covering the potential use of Schedule UTP to identify issues in pre-filing taxable years should send a few more shivers down corporate filers’ collective spines. A previously unanswered question that had caused some concern in the tax community was whether issue spotting in Schedule UTP would be used by auditors to uncover the same issue in prior cycles already under examination. Prior IRS announcements had not specifically addressed the issue, but had only indicated that use of the schedule would be coordinated centrally and that exam teams would require training before dissemination to the audit level.
A November 1, 2011 memo from LB&I Commissioner Heather Maloy to the field and the accompanying UTP Guidance Memo clarifies that an issue disclosed on Schedule UTP may indeed result in scrutiny of the same issue in a pre-Schedule UTP tax year under examination (albeit with approval of an IRS team manager), and potentially even a prior year not under examination.
A final topic of interest from the fallout over the modest number of disclosures in this year’s Schedule UTP filings that may also eventually percolate to the surface, is one on which I have previously commented in two TaxBlawg posts (accessed here and here). Although the IRS has only provided general descriptions of the types of items most typically disclosed on the recently filed schedules, no mention has been made of disclosures of items for which no reserve is required but which the taxpayer expects will need to be litigated. Given the ongoing fight over the scope of work product protection, as most recently raised in the privilege dispute over tax accrual workpapers in Wells Fargo v. United States, No. 10-MC-57 (D. Minn. Jul.20, 2011), one has to wonder whether taxpayers fighting future battles on similar issues for tax years subject to the Schedule UTP regime will be handicapped by omitting an item “anticipated to be litigated” from their Schedule UTPs.