On January 26, 2010, the US Internal Revenue Service (“IRS” or the “Service”) issued Announcement 2010-09 outlining very significant new procedures related to the IRS’s access to information contained in tax accrual workpapers (TAW), a subject that has been highly controversial in recent years.1 In essence, the IRS proposes that, rather than attempt to seek TAW during an audit, taxpayers will be required to attach to their tax returns a schedule that contains select information from their TAW. 

“Time of Filing” Reporting Requirement For Uncertain Tax Positions

The new tax return reporting requirement would apply to taxpayers with total assets of more than $10 million that have had financial statements prepared under FASB Statement No. 109 (FIN 48), or other similar accounting standards, reflecting uncertain tax positions taken for financial reporting purposes. For each reserve item that impacts US tax liability, corporate taxpayers that are subject to the proposed rules would be required to divulge a “concise” description of each uncertain tax position for which the taxpayer or a related entity has recorded a reserve in its financial statements, as well as a statement of the “maximum amount” of the potential federal US tax liability associated with each such position.

The Announcement states that the Service is in the process of developing a new tax return schedule for use in reporting this information. It also states that the schedule would require a rationale for the tax position and a general statement of the reasons for determining that the position is an uncertain tax position. The description would be required to be in “sufficient detail” so that the Service can determine the nature of the issue. 

While the Announcement states that the sufficiency of a description is a facts and circumstances determination for each taxpayer, it adds that the statement must include: (i) the Code sections potentially implicated by the position; (ii) a description of the taxable year or years to which the position relates; (iii) a statement that the position involves an item of income, gain, loss, deduction, or credit against tax; (iv) a statement that the position involves permanent or timing issues; (v) a statement whether the position involves a valuation issue; and (vi) a statement whether the position involves a computation of basis. The Announcement makes clear that taxpayers would be required to report all uncertain tax positions related to US federal income taxes — even those for which no reserve was ultimately recorded (for whatever reason). 

Regarding the “maximum liability” requirement, the Announcement states that the schedule should specify the entire amount of United States federal income tax that would be due if the position was fully disallowed on audit. The Announcement also states that the maximum liability requirement is determined without regard to the taxpayer’s individual risk analysis of its likelihood of prevailing on the merits.

A “Reasonable Approach”

In remarks made to the New York State Bar Association on the same day the Announcement was issued, IRS Commissioner Doug Shulman stated that the Service views the proposed rules as a “reasonable approach” that is only intended to effectuate efficient audits, not to “get in the heads of taxpayers.” He noted that the Announcement would not require taxpayers to disclose their risk assessment or tax reserve amounts, although he warned that the IRS is certainly within its legal rights to request such information. 

The required disclosure of the risk assessment analysis and tax reserve calculations contained in tax accrual workpapers is currently petitioned for certiorari to the Supreme Court from the First Circuit in Textron, where the government has obtained permission to extend the due date for filing its response until February 26, 2010.2 According to Commissioner Shulman, the kind of information that would be disclosed under the proposed rules is the same kind as companies are already required to assemble in compiling their tax reserve workpapers.

Comments Solicited

The IRS said it intends to publish a draft of the new schedule as quickly as possible for public comment. In particular, the Announcement solicits comments on a number of points, including:

  • Whether the scope of required disclosure should be modified, for example, by excluding positions for which no reserve is taken;
  • Whether the list of information to be included in the “concise” description of a reserve item should be modified;
  • Whether, in some circumstances, disclosure should be required at the outset of an audit, instead of as part of the return;
  • Whether the maximum tax exposure should be stated as a single dollar value or range, and whether there are alternative ways to allow the IRS to evaluate the relative importance of the issue; and
  • Whether the maximum tax liability should relate only to the tax period covered by the return, or whether the effects of items from other periods (e.g., NOLs, excess credit carryovers, etc.) should be taken into account.

Although the Announcement is silent on the effective date, the Commissioner has indicated in statements to reporters that the new rules, if adopted, would not be effective for the 2009 taxable year returns. Public comments are due by March 29, 2010. 

For more information concerning the implications of the proposed reporting requirements, please contact Larry R. Langdon at +1 650 331 2075, John T. Hildy at +1 312 701 7769, David Abbott at +1 212 506 2642, or your regular Mayer Brown lawyer.

Learn more about Mayer Brown’s Tax Controversy practice.


1. As we have previously described in past Client Updates, the IRS’s ability to discover TAW has been the subject of protracted litigation. See, e.g., our August 17, 2009, Update, “US First Circuit Changes Course In Textron; Holds Tax Accrual Workpapers Are Not Protected After All.” The case is currently being petitioned to the Supreme Court for review. 

2. See Textron, Inc. and Subsidiaries v. United States, Dkt. No. 09-750.