Public companies are required by law to disclose certain information within their financial
statements in a timely manner. This disclosure of material items on their financial statements
is important as it gives investors, potential investors, and the general public the ability to
make informed decisions about the company.
FASB ASC 740-10 applies to financial statements that follow GAAP and provides rules for
accounting for uncertain tax positions (UTPs). UTPs occur when there is a level of
uncertainty if a tax position will be accepted by a taxing authority or sustained. ASC 740-10
requires that tax positions meet at least a 50% likelihood of being sustained in order to be
recognized in the financial statements. For UTP’s that are not fully recognized (at least 50%
certainty of being sustained), the uncertain tax benefit can be recorded as a noncurrent
liability. If a corporation needs to make a correction to its tax return involving the treatment of
UTP’s, it needs to fall within the statute of limitations. Section 6501 states that the amount of
any tax imposed shall be assessed within three years after the return was filed. This section
also states that in the case of any omitted gross income in excess of 25%, the statute extends
to 6 years after the return was filed. Section 6501(C) provides exceptions to these statutes. If
a false return was filed, there is a wilful attempt to evade tax, or there was no return filed, the
3- and 6-year statute does not apply and there is no set timeframe that the government must
act by.
In public company financial reporting, transparency and accuracy are essential to gain and
keep investor trust and market efficiency. Under U.S. Generally Accepted Accounting
Principles, it is crucial to disclose material items in the financial statements to provide a true
and fair view of a company's financial health and performance (FASB ASC 235-10-50). For
this discussion, material items include those that are likely to influence the decision of an
investor or creditor.
In the context of taxation, the ASC 740-10 is ‘the rule’ to follow. This provision addresses
uncertain tax positions and it is important for multiple reasons. First, it requires companies to
evaluate their tax positions. If it is more likely than not (a likelihood of more than 50%) that a
tax position would not be sustained upon examination by tax authorities, the tax benefit is not
recognized in the financial statements. Instead, a reserve must be established for the potential
tax burden (ASC 740-10-25). However, creating a reserve is not the only option for
companies that have taken uncertain tax positions on their previous years' returns. Companies
can consider amending their tax returns voluntarily, a step which might prevent penalties or
interests if the initial tax position is not supported by the IRS. This approach is allowed by
section 6662, which provides for a 20% accuracy-related penalty on any understatement of
tax liability.
Companies also can consider disclosing their uncertain tax positions in Form 8275
(Disclosure Statement) or 8275-R (Regulation Disclosure Statement. These forms are used to
disclose items or positions that are contrary to Treasury Regulations (Treas. Regs. 1.6662-
3(c)(2)), in theory this should reduce the possibility of accuracy-related penalties.
When it comes to the statute of limitations for IRS tax audits generally runs three years from
the due date of the return or the date it was filed, whichever is later (section 6501). This limit
might extend to six years if there is a substantial omission of items (more than 25% of gross
income), per section 6501(e).
A large percentage of my job involves tax compliance and consulting for businesses. I
typically work with passthrough entities and therefore have little experience with ASC 740. b
While ASC 740 is an accounting concept, it involves temporary differences in the recognition
of income or deductions between the financial statement and the tax return. It is important for
corporations to report material uncertain tax positions because there is some doubt whether
the tax authority is going to accept the taxpayer’s position. b Material matters are those that can
affect the decisions of stakeholders (Harvard Business School, 2016). Therefore, if there is
uncertainty in a tax position that has a material effect on the financial statements it must be
disclosed so that stakeholders can make informed decisions about the corporation. b b
Under FASB ASC 740-10 a corporation should first determine if the position has more than
50 % probability of being sustained upon examination before any recognition in the financial
statements. Instead of recording a reserve related to the uncertain tax position, a corporation
can choose to record a noncurrent liability.
If the corporation wants to make a correction to its tax return because of the treatment of the
uncertain tax position, it must do so within the statute of limitations. b Keep in mind that these
statutes indicate how long a taxpayer must make a correction, and generally how long the IRS
must assess tax or initiate a proceeding for collection of tax.
Under section 6501(a) the statute of limitations is generally 3 years from the date the return
was filed. If there is a substantial omission, defined under section 6501(e)(A)(i) as an
amount exceeding 25% of the gross income, the statute extends to 6 years. Exceptions are
listed under section 6501(c), where there is no limitation in the number of years the
government must act against a taxpayer. These include filing a false tax return, a wilful
attempt to evade tax, or not filing a return at all.
Harvard Business School. (2016, January 5). What is materiality in accounting and why is it
important? Retrieved from Harvard Business School Online:
https://online.hbs.edu/blog/post/what-is-materiality
Disclosures are timely release of information about a company that could influence an
investor's decision. These disclosures can be positive or negative new, data, and operational
details that impact the business. The idea behind them is that all parties should have the same
access to the facts in the interest of fairness.
Under 740-10, companies are required to disclose uncertain tax positions that that a
reasonably possible that the positions and events could change the recognized tax benefits
within the next 12 months. The disclosures require the nature of uncertainty, nature of the
even that could occur within the next 12 months to cause the change, and the estimated range
of the reasonably possible change or a statement that says an estimate could not be made.
When the disclosure is prepared, all facts and circumstances should be considered. The
information in the disclosure should be detailed so the reader can use context as to which
circumstances may cause the unrecognized benefits to change.
If a client does not record an uncertain tax position on their financials, they can file a
Schedule UTP (Uncertain Tax Positions) with their corporate tax return.
The statute of limitation for audits is generally the last three years of returns filed. There are
some expectations to the three years which include a false return to evade taxes, a wilful
attempt to evade taxes, or if there is no return filed. Under these exceptions the statute of
limitation does not apply and audits could happen at any time. Another expectation is if the
taxpayer omits 25% of their gross income. Under this exception, the IRS can audit returns at
any time within 6 years after the return was filed.
16.6 presentation and disclosure for uncertain tax positions. PWC Viewpoint. (n.d.).
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/financial_statement_/financial_st
atement___18_US/chapter_16_income_ta_US/166_presentation_and_dis.html#pwc-
topic.dita_1419040512151589
Section 6501 - Limitations on assessment and collection
Segal, T. (2022, November 17). What is disclosure? how it works and laws on transparency.
Investopedia. https://www.investopedia.com/terms/d/disclosure.asp
Uncertain tax positions - schedule UTP. Internal Revenue Service. (n.d.).
https://www.irs.gov/businesses/corporations/uncertain-tax-positions-schedule-
utp#:~:text=Uncertain%20Tax%20Position%20Reporting&text=Corporations%20filing%20F
orms%201120%2C%201120,position%20in%20audited%20financial%20statements.
