Schedule UTP and Penalties (9/21/13)

Lee Sheppard has an interesting article on privileges addressing issues in Wells Fargo & Company v. United States, 2013 U.S. Dist. LEXIS 78714 (D MN 2013).  See Lee A. Sheppard, The New Look of Privilege, 140 Tax Notes 1159 (Sept. 16, 2013).  Wells Fargo is a lengthy opinion with extensive analysis of privileges for Uncertain Tax Positions and tax accrual workpapers.  I do not link the opinion here or otherwise discuss it  because it is not relevant to the subject of this blog entry.

Addressing the Schedule UTP, Lee says in the article:

There is no penalty for failure to file a complete or accurate Schedule UTP. Indeed, there is no penalty for failure to file a complete return, as the IRS discovered during the offshore account imbroglio. There is a statutory penalty for failure to file a return at all (section 6651).

I want to address that statement, but first briefly describe the Schedule UTP.  See the IRS website for the Schedule UTP Form 1120, here.  The instructions provide:

Reporting Uncertain Tax Positions on Schedule UTP 

Tax positions to be reported.   

Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return for which two conditions are satisfied. 

1. The corporation has taken a tax position on its U.S. federal income tax return for the current tax year or for a prior tax year. 

2. Either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position. 

A tax position for which a reserve was recorded (or for which no reserve was recorded because of an expectation to litigate) must be reported regardless of whether the audited financial statements are prepared based on U.S. generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above (for example, modified GAAP).

I want to question Lee's statement quote above.  As to a direct penalty for failure to file a complete or accurate Schedule UTP, this is the jurat for the Form 1120, corporate return:

Deja Vu All Over Again (1/24/13)

The U.K. Supreme Court held that "Advice by accountants cannot be kept secret in the same way that legal counsel is confidential."  See Estelle Shirbon, Tax advice not secret like legal counsel, UK court rules (Reuters 11/23/13), here.

I use the famous Yogi Berra quote (Wikipedia entry here) as the title of this article, but the U.S. has been through this fight before and reached the same result.

I offer the following on the U.S. rule from the most recent draft of my Federal Tax Procedure book (footnotes omitted):

The Courts have resisted expanding the common-law privileges that are available even when strong policy arguments are made that privileges should be available.  Courts thus routinely reject the existence of an accountant/client privilege even though one may exist under state law.  Couch v. United States, 409 U.S. 322 (1973).  In United States v. Arthur Young & Co., 465 U.S. 805 (1984), the IRS issued a summons to the taxpayer's independent certified public accountants to obtain the information and documents behind the tax reserve reported on the taxpayer's certified financial statements.

At this point, I should explain generally the jargon that helps explain the law and IRS policy and practice in this area.  Publicly held companies prepare and file public financial statements that report the financial results of their operations for a period.  The financial statements include a profit and loss statement for a period (a year period for the major filings), as well as an ending balance sheet, and extensive notes to assist in making the statements comprehensible.  In reporting a result for the period, a company must accrue liabilities that arose during the period and, on the ending balance sheet, must show any accrued but unpaid liabilities.  Under financial accounting standards, reserves for federal income tax liabilities must be accrued and reserved in certain cases.  Specifically, with respect to tax planning that might otherwise be reflected as a benefit on the financial statements, reserves must be accrued to reflect the probability that the benefits may not be ultimately sustained.  In making a decision whether and how much to reserve for such unpaid potential liabilities, a company internally will prepare workpapers that back up its decisions.  Similarly, when the independent auditor then attests the financial statements, the auditor prepares audit workpapers that back up the attestation.  The company’s and the auditor’s workpapers underlying that type of liability or reserve are called “tax accrual workpapers” or some variation of that term.  The tax accrual workpapers should be distinguished from the “tax reconciliation workpapers” which reconcile the financial reporting to the tax return.  The tax reconciliation workpapers are not audit workpapers, because they are not prepared by the company in making the financial statements or by the independent accountants in attesting them.