The Internal Revenue Service has finalized its requirement for companies to tell tax authorities where it may have some weak spots in its tax return—and it’s not quite as draconian as companies originally feared.

The reporting requirement fulfills IRS goals for cutting to the chase on where there are issues to investigate in a tax return in a “very balanced and sensible fashion,” said IRS Commissioner Doug Shulman in rolling out the final rules. Affected companies will be required to add Schedule UTP to their corporate tax returns beginning with their 2010 filings, which generally are due in September 2011.

Schedule UTP requires companies to list issues in their tax return where they may have some uncertainty about how well they will hold up under IRS scrutiny. The IRS originally proposed companies would be required to describe each position and attach a dollar amount representing the maximum possible exposure.

In the final form, however, the IRS dropped the requirement for a dollar amount and instead requires companies to rank their uncertain tax positions from greatest to lowest risk based on the reserves they’ve established for each position in their financial statements. “Taxpayers will use U.S. federal income tax reserve amounts to rank the positions on the schedule, but will not be asked to provide reserve amounts anywhere on the schedule,” Shulman said.

The IRS also determined it will phase in the UTP filing requirement, making it effective in the first year only for companies with revenues of $100 million or greater. Companies between $10 million and $100 million in revenue will be subject to a five-year phase-in, to give both the IRS and corporate filers more time to learn and use the reporting system.

When the IRS initially proposed the new filing requirement in April, corporate tax experts cried foul on a number of points, focusing largely on ways the requirement would trod attorney-client privilege and burdens it would add to already stretched corporate tax resources.

Robin Greenhouse, a partner with the law firm McDermott Will & Emery, said the final filing requirement reflects some meaningful concessions from the IRS.

“It is a significant relaxation of what was proposed,” said Greenhouse. “There are still some corporations that would rather not see the schedule implemented, but this was certainly a major move in the right direction for corporate taxpayers."

The IRS has established a page on its Website devoted entirely to the final Schedule UTP requirement, providing instructions on how to file the form and directives to its field staff on how to implement the requirement.