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

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

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

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.

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

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 This includes primarily calendar year filers and fiscal year filers of Sch. UTP through Feb. 2013.  This count has been validated to remove duplicate filings and filings with no tax positions disclosed on Schedule UTP. The count will increase as fiscal year filers continue to be received. Tax Year includes calendar year and fiscal year returns with year ends through November 30th of the following year. Timely TY2011 tax returns will continue to be filed through August 2013. The top three code sections reported by UTP filers are IRC 41, 482 and 162. Analysis of UTP filers’ concise descriptions, however, revealed that the third highest primary IRC section is actually IRC 263 capitalization.

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.”

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

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

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/Schedule-UTP-Guidance-for-Preparing-Concise-Descriptions

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

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

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.

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. 

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

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

Questions on Schedule UTP UTP Questions  lbi.utp.communications@irs.gov