On February 4th, the IRS released statistics on the filings of Uncertain Tax Position Statements (Schedule UTP) for the 2012 tax year.  The statistics show there were 1,743 Schedule UTP filers and 4,166 uncertain tax positions reported for the 2012 tax year.  Both numbers are down from 2011 and 2010 numbers despite massive tax reserves being held by the largest corporations.  The IRS must be disappointed by the Schedule UTP numbers because they were disappointed with the 2010 numbers and 2012 is even lower.  The disappointing Schedule UTP numbers are opportunity knocking for potential tax-whistleblowers with access to a company’s tax accrual work papers.  As IRS resources continue to dwindle, the tax-whistleblower program may be the last line of defense for enforcement of corporate tax laws.

The drop in Schedule UTP filers and uncertain tax positions reported is particularly curious because the asset threshold for those corporations that must file Schedule UTP dropped from $100 million to $50 million for the 2012 tax year. 

Logically, one would expect the IRS to reel in more filers and uncertain tax positions with their wider net.  The drop in numbers not only signifies that Schedule UTP is not capturing more fish in between the $50 to $100 million asset range, but more importantly, it could signify that many companies that filed Schedule UTP in previous years have failed to comply in 2012.

The aim of the Schedule UTP is to capture information that taxpayers reported to their financial auditors for the purpose of establishing cash reserves for their uncertain tax positions.  More specifically, under the accounting requirements of FIN 48, a company must reserve, or hold back, earnings for tax positions for which the company thinks the IRS has a greater likelihood of prevailing than the company. 

Of course, as discussed in an earlier blog post, the Schedule UTP has largely been an inadequate tool for the IRS.  As corporations aggregate tax positions and provide very general  “concise descriptions” of their tax issues, the Schedule UTP has not turned out to be the roadmap for an IRS audit that it was once feared to be.

Nevertheless, the Schedule UTP is a tool that assists IRS agents in issue spotting and enforcement of tax compliance becomes increasingly difficult without it.  The complex nature of tax law and the difficulty in auditing large corporations whose tax lawyers and accountants are consistently looking to exploit murky tax laws puts the IRS behind the eight-ball in trying to enforce corporate tax compliance.  Added to this, the IRS must accomplish its mission with a reduced budget and reduced resources under the watch of a distrusting public.  Now, the Schedule UTP numbers for 2012 are yet another blow to corporate tax enforcement.  

In these trying times for the IRS, the tax whistleblower program remains a key tool for tax enforcement.  As the IRS’s resources are further reduced, tax whistleblowers should now, more than ever, step up and be that resource the IRS desperately needs. 

Lynam Knott