The Internal Revenue Service has rolled out guidance on how examiners should use Schedule UTP disclosures as part of the Compliance Assurance Process for tax year 2010.

Heather Maloy, commissioner of the large business and international division at the IRS, issued a memo to her CAP teams informing them that 2010 returns with the UTP schedule for filers in the CAP program will be released to CAP teams shortly. CAP is an IRS program through which participating corporate taxpayers work with IRS examiners to resolve tax issues before they file the return instead of afterward. The IRS ran a six-year pilot program before making the CAP program permanent in early 2011.

Schedule UTP is a new filing developed by the IRS to compel most large corporate taxpayers to itemize tax positions that may not hold up under IRS scrutiny. More specifically, Schedule UTP disclosures are required for any item where a company has recorded a reserve in its financial statements, suggesting it anticipates the possibility of a future tax liability, or for any items where it has not recorded a reserve because the company expects litigation. The IRS developed the requirement to make it faster and easier to cut to the core issues in corporate tax returns that deserve more careful attention. A five-year phase-in for the new filing began for tax year 2010.

Maloy's guidance applies only to CAP returns filed for the 2010 tax year by CAP taxpayers that were in CAP in 2010. She promised additional guidance and procedures applicable to all other exams in the LB&I division are still being developed and will be issued later.

The guidance tells CAP teams to study the UTPs and compare the disclosures against the list of taxpayer disclosures made during the CAP year. It outlines actions examiners should take when the find discrepancies. The guidance reminds examiners that if a return doesn't contain a UTP, it could be because they don't yet fall under the filing requirement or they might not have any issues to report.

In keeping with the IRS's previously stated “policy of restraint” with respect to financial statement reserves, the guidance tells CAP team members they cannot ask about the make-up of financial statement reserves even if the team suspects the reserve amount suggests there should be more disclosed in the Schedule UTP. “The team may only ask the taxpayer to confirm that there are no issues to be disclosed according to the Schedule UTP reporting requirements,” Maloy instructs. “The increase in reserves could relate to state, local or foreign reserves, or a pre-2010 tax position, neither of which must be reported on the Schedule UTP.”