UTP & M-3 Updates TEI-IRS Liaison Meeting The Woodlands, TX May 14, 2012

2 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, and Help prioritize the selection of issues and taxpayers for examination.

3 UTP Directive for LB&I Establish a centralized review process housed in LB&I to enable IRS to: –Determine whether disclosures are in compliance with the schedule instructions; –select issues for audit; –identify trends; –identify and understand gaps in guidance; and –determine the proper treatment of UTPs.

4 LB&I UTP Implementation LB&I implemented a process for identifying and centrally collecting returns with UTP schedules, LB&I established a coordinated and consistent approach for handling UTP information, UTP guidance and training developed and delivered, Centralized Review of Schedule UTPs by subject matter experts, Feedback is being collected from revenue agents, managers and SMEs about the Schedule UTP.

5 UTP Filing Statistics TY ,947 Taxpayers filed Schedule UTP –21% Were CIC taxpayers –3% CAP taxpayers –97% Form 1120 –3% Forms 1120F, L & PC –25% Reported International Ownership –41% Returns prepared by the “Big 4” –49% Reported only one uncertain tax position

6 UTP Issue Statistics TY % were International issues 32% were Transfer Pricing issues 26% of concise descriptions identified as “major issues” 69% of concise description issues identified as permanent or both permanent/timing issues 32% of issues disclosed from taxpayers in three states Average of 3.1 disclosures for CIC taxpayers Average of 1.9 disclosures for IC taxpayers Top IRC sections were 41, 482 and 162, representing 38% of total issues disclosed

7 Top Ten Industries with UTP Disclosures

8 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.”

9 Results of the Review Only 3% of the more than 4,000 concise descriptions reviewed did not sufficiently follow the Schedule UTP Instructions Education and Outreach Letters mailed to 105 taxpayers No specific action required this year, but….

10 Hypothetical Examples of 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 we are awaiting 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.

11 UTP Next Steps 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

Schedule M-3 Review

13 Schedule M-3 Timeline December 2004 –Form 1120 Schedule M-3 introduced for corporations with $10 million or more in total assets replacing the Schedule M-1 –As requested by Taxpayers to address burden relief - only columns (b) and (c) required for 2004 –All columns (a) through (d) required by December 2005 December 2006 –M-3 applied to Forms 1120-L and 1120-PC with $10 million or more in assets and mixed group sub-consolidation introduced –M-3 applied to Forms 1120-S and 1065 with $10 million or more in assets and to certain smaller partnerships December 2007 –M-3 applied to Form 1120-F with $10 million or more in assets

14 Schedule M-3 Timeline December 2008 –Question on Financial Statement Accounting Standards added to Part I –Financial Statement Total Assets and Total Liabilities added to Part I September 2010 –Commissioner Shulman announced that IRS will review M- 3, Sept 2010 December 2010 –R&D and Section 118 exclusion added to Part III

15 Extensive External & Internal Stakeholder Input Obtained TEI and AICPA Comments IRSAC Recommendations External Focus Groups with Non-CIC Taxpayers IRS/LB&I Employee Survey IRS/LB&I Employee M-3 Focus Groups Other Government Stakeholders

16 External Feedback Themes Reduce taxpayer burden Streamline M-3 and supporting schedules Simplify and reduce required tax lines Align 1120 M-3 and 1120 page 1 Scale back Parts II and III Reduce or eliminate need for attached schedules Eliminate Form 8916-A COGS detail Increase asset threshold for filing the M-3 Communicate how IRS/LB&I has used the M-3

17 Internal Feedback Themes M-3 helps with risk analysis, issue identification, and in identifying LUQ items M-3 should reconcile to 1120 page 1 Incorporate 8916-A into M-3 Too much is reported in “other” and netting Too many missing attachments Mixed views as to whether M-3 saved time Slight inverse correlation between length of IRS service and preference for M-3 Need for additional and recurring M-3 training

18 Project Status Intensive review of all feedback completed Recommendations developed Pending LB&I and IRS Commissioner approval Proposed changes will then be shared for public comment Revised Schedule M-3 form and instructions will be finalized and implemented for TY13