Schedule UTP Update
July 2013
Schedule UTP overview
 Required for corporations that:
 Issue or are included in audited financial statements that report
reserves (U.S. GAAP or other) for U.S. income tax on positions
in the corporation’s U.S. income tax return
• Compiled or reviewed financial statements are not audited
financial statements
 File Form 1120, 1120-F, 1120-L or 1120-PC
 Report Assets on Schedule L balance sheets
≥ $100 Million for 2010 returns
• Transition period rules
– With Assets ≥ $50 Million for 2012 returns
– With Assets ≥ $10 Million for 2014 returns
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Schedule UTP overview, cont.
 A list and concise description of all positions taken in tax
return for which the taxpayer or a related party creates
reserves for U.S. income tax in audited financial
statements
 Also list and describe UTPs anticipated to be resolved only by
litigation
 No amounts are required, nor is an assessment of the
hazards or an analysis of support for or against the tax
position necessary.
 UTPs must be ranked by actual size of reserve amount
and major UTPs (10 percent or more of total US income
tax reserves) must be identified
 Part II, List newly-established reserves for positions
taken in previously filed returns
 Not required in first year filing Schedule UTP
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Schedule UTP objectives
 IRS strategy to improve compliance through greater
transparency
 Reduce the time it takes to find issues
 Spend more time discussing the law as it applies to the
facts, rather than looking for information
 Identify areas of uncertainty requiring guidance
 Help prioritize the selection of issues and taxpayers for
examination
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UTP directive for LB&I
 Establish a centralized review process in LB&I to enable
IRS to:
 Determine whether disclosures are in compliance with the
schedule instructions;
 Select issues for audit;
 Identify trends;
 Identify, understand gaps in guidance; and
 Determine the proper treatment of UTPs.
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LB&I UTP implementation
 LB&I implemented a process for identifying and centrally
collecting returns with schedules UTP
 LB&I established a coordinated and consistent approach
for handling UTP information
 UTP guidance and training was developed and delivered
 Centralized review of Schedules UTP by subject matter
experts (SMEs)
 Feedback is collected from revenue agents, managers and
SMEs about Schedule UTP
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UTP statistics taxable year 2011
 1,862 taxpayers filed Schedule UTP for taxable year (TY)
2011, three-quarters of whom also disclosed UTPs for
2010
 4,634 issues disclosed, including 1,035 reported on Part II
as prior year positions
 27 percent of issues disclosed were international issues
 Top IRC sections were 41, 482 and 263, representing
nearly 50 percent of total disclosures
 21 percent were transfer pricing issues
 Average of 4.0 disclosures for CIC taxpayers
 Average of 2.2 disclosures for IC taxpayers
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Review of concise descriptions
 Per Schedule UTP instructions:
 “Provide a concise description of the tax position, including a
description of the relevant facts affecting the tax treatment of the
position and information that reasonably can be expected to
apprise the IRS of the identity of the tax position and the nature
of the issue.”
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TY 2010 review—education and outreach
 In the first year review of TY 2010 returns with Schedule
UTP, outreach focused primarily on descriptions that did
not disclose a position or an issue (examples on next slide)
 Education and outreach letters were mailed to 105
taxpayers covering about 3 percent of the total issues
disclosed
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Hypothetical examples of TY 2010
insufficient concise descriptions
 This issue is under audit for a prior year
 This issue is one for which we have recorded a
reserve because it was unresolved in prior years and
is currently in Appeals
 This is an issue for which we have recorded a reserve
because the appropriate tax treatment of this position
is unsettled and we are awaiting published guidance
and the outcome of pending litigation
 This is an issue that we know is subject to IRS
scrutiny
 This issue relates to how we have characterized
certain expenditures and related deductions
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TY 2010 review—additional guidance
 In addition to education and outreach letters mailed to
taxpayers whose concise descriptions did not identify a tax
position and/or an issue, guidance was issued and posted
on irs.gov to improve quality and completeness of concise
descriptions overall
 Guidance focused on ensuring that concise descriptions–in
addition to identifying a tax issue–also provide sufficient
relevant facts affecting the tax treatment of the item and
sufficiently describe the nature of the issue
 Examples were provided for issues involving research
credit, transfer pricing, domestic production activities
deduction, and Section 162 business expense deductions
 The guidance can be found at:
http://www.irs.gov/Businesses/Corporations/ScheduleUTP-Guidance-for-Preparing-Concise-Descriptions
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TY 2011 review
 The TY 2011 review considered the additional
guidance issued by the IRS and focused on ensuring
that concise descriptions–in addition to identifying a
tax issue–also provided sufficient relevant facts
affecting the tax treatment of the item, and sufficiently
described the nature of the issue
 Treasury Regulation 1.6012-2(a)(4) requires that
Schedule UTP be filed “in accordance with forms,
instructions, or other appropriate guidance provided by
the IRS”
 982 concise descriptions were considered incomplete,
and education and outreach letters were sent to 578
taxpayers
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TY 2011 review, cont.
 The primary shortcoming of the concise descriptions
deemed incomplete was that they did not sufficiently
describe the nature of the issue or the relevant facts
affecting the tax treatment of the position
 The only way to discern this information would be to
conduct an in-depth review of the return, which runs
contrary to the purpose for which the Schedule UTP was
implemented
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Concise description guidance
 These examples, from irs.gov, show concise
descriptions that satisfy the Schedule UTP instructions
and guidance. The underlined sections provide the
sufficient relevant facts needed to make the descriptions
complete. Without this information, the descriptions are
too generic and, therefore, of limited utility to the IRS.
 Research credit issue–The taxpayer incurred support department costs
that were allocated to various research projects based upon a
methodology the taxpayer considers reasonable. The issue is whether
the taxpayer’s method of allocating these costs is acceptable by the IRS.
 Transfer pricing issue–The taxpayer allocated management service
costs between its domestic subsidiaries and a foreign subsidiary located
in Country X using a methodology the taxpayer considers
reasonable. The issue is whether the taxpayer’s method of allocating
these costs is acceptable by the IRS.
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Concise description guidance, cont.
 Domestic production activities deduction–The taxpayer
claimed the domestic production activities deduction on
certain production activities income for 2011. The issue is
whether costs incurred for product aging processes that occur
in designated areas located at the taxpayer’s distribution
facility are considered manufacturing or production costs of
the tangible personal property, and therefore, a component of
qualified production activities income.
 IRC Section 162 business expense deductions–The
taxpayer claimed a deduction for travel and entertainment
expenses for conventions and sales meetings. The issues are
whether adequate documentation has been retained to
substantiate the deductions claimed and whether some of the
expenses constitute entertainment subject to a 50 percent
limitation.
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UTP next steps
 For TY 2012, the Schedule UTP filing requirement is
extended to taxpayers with assets between $50 million and
$100 million
 LB&I will continue to review the quality and completeness
of concise descriptions
 Future actions will be determined based on the results of
subsequent reviews of information provided on Schedules
UTP
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UTP next steps, cont.
 Review and assess feedback from SMEs and field
personnel and results of examinations of returns with
Schedule UTP
 Identify areas where additional guidance, training, or
direction may be warranted
 Improve Schedule UTP instructions and/or form
 Prepare for continued implementation of Schedule UTP to
additional taxpayers
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Questions on Schedule UTP
UTP Questions
 lbi.utp.communications@irs.gov
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