[MUSIC]

Hello, in this module, we're going to talk about income taxes but

we're gonnao change the focus to uncertain tax positions.

When actually you will record

a tax deduction that might be a little bit on the edge.

To introduce the topic, we're going to go again to Grant Thornton and

talk to some tax professionals about how they address uncertain tax positions.

So our topic today is uncertainty in tax positions and how that

affects the recognition and measurement of tax, assets and liabilities.

What can you tell us about that?

>> Well, I deal with it quite a bit.

It's a very significant issue in the corporate tax world, especially for

public companies that really focus on their earnings per share.

I will tell you, because I've been doing work in this profession for 35 years.

And I would say 35 years ago,

people were very unclear about their uncertain positions.

And since the standards changed a few years back, it used to be called FIN 48,

there's been a lot more precision put in the process.

And companies and auditors, CFOs, tax directors are all working together to make

sure that they have the proper reserves on their balance sheet.

And the thing that I've seen is that companies when they do tax planning,

they try to figure out whether or not they will need to set up a reserve for

it before they get to year end.

So in other words, at the time they're doing the transaction, they want to think

through, is this going to end up requiring a reserve on the balance sheet?

So I think public companies are very resistant to doing planning strategies

that result in large, large uncertain positions to be recorded.

I don't know private companies.

What would you say about private companies?

>> Private companies are similar in the sense that

there are times when that reserve or

that uncertainty can lead to an exit strategy or something along the way where

you have to evaluate where that liability comes from and how it was created.

So there are times where that uncertainty is actually very important,

especially along with the fact that when you're reviewing it, you have to

understand how that uncertainty is related to the industry standard.

And if you have some ability or desire to go public in the future,

it becomes a bit more important.

So it's always necessary for us to engage a specialist like Mike's group.

>> Yeah, and I think, just to add on to that,

I think there's also a heightened level of sensitivity around uncertain tax positions

just because of the disclosure these days in tax returns with Schedule UTP.

And the perception by the IRS that there's some abuse as it relates to the area

that I particularly specialize in, and that's credits and incentives.

With the reorganization of LBNI now and the focus in that particular area,

I think when companies evaluate their uncertain positions,

there's maybe not as much uncertainty around recognition, but

maybe more uncertainty around measurement.

Because a component of that is taking into consideration the audit environment that

we're in right now.

And that's a fluid situation that's constantly evolving as it

relates to specific tax issues and something that has a direct

impact on the measurement process as it relates to 740.

>> So what are some of the tools that you use in evaluating the uncertainty in

a tax position?

>> Well, definitely we use our technical resources.

I would say our National Tax Office is very important.

If we've got a major, significant, uncertain position, we're going to make

sure that they agree that the amount is more likely than not sustainable.

There are software tools I can use, but mostly this is a judgment call.

It's more of a technical judgment call, and it requires really talking.

I talk a lot to my peers.

I don't try to go this alone.

I talk to other professionals who've maybe encountered this issue,

because that's where you start to get a a sense, how does the IRS view these things?

What's the widely accepted treatment of these type of issues?

because sometimes if you take it from a very isolated perspective,

you might come to a conclusion.

But if you talk to a few other people, said no, I've had a client,

he took this position, they got audited, the IRS was okay.

So you really need to learn to reach out to your compatriots.

And this is true even in corporate environments.

I think if you're a tax director, you need to talk to a few different people

to make sure you're coming up with a proper conclusion.

>> Yeah, and I'll just pile on and add with what Thatcher is saying is going

through, when you're on the audit side, or you're even on the preparation side for

a tax provision, you have to understand and analyze what the case law looks like.

So there'll be times where the IRS may have taken a situation,

and they've taken it to court, and they've lost multiple times.

But that still means that there's a situation where you do have

an uncertainty, where you have to allocate that uncertainty to the position.

Although you know you'll take it on the return,

because you're going to establish the documentation in place.

So it may be a position that we feel has merit with the return, but you still have

to make sure that you document it properly in order to be able to communicate that to

the audit team to the extent you're on the tax provision preparation side.

Or if you're going to have that discussion at some point with the IRS

to have that documentation in place at that point too.

So one of the benefits is it sets yourself up to have the documentation and

the preparation and analysis around the various positions so

your facts are established, and that's set in stone and established going forward.

>> The two pieces that I think you guys hit on squarely is the technical side of

things which is certainly very important considering the code, the regs, and

case law that's out there.

But then the practical side of things which is the whole audit envrionment.

How is an issue perceived by the IRS?

What are our recent experiences with a particular issue given

a set of certain facts and circumstances of a particular client?

And then how does that play into the whole measurement process?

It's not purely technical.

There is a lot of experience that plays into it, as you had mentioned, Thatcher.

And so bringing our cumulative experiences and technical skills together to evaluate

these positions in conjunction with our audit team is extremely important.

>> One other comment I would make is in evaluating uncertain positions,

you have to look at the legal environment you're dealing with.

And while the US IRS rules are quite well-documented and there's procedures,

what they have to follow, in some countries, the rules are a little more

uncertain that they don't have things like private letter rulings.

They don't have as many regulations.

The case law is a little less consistent so

you really have to rely heavily on local country specialists,

often attorneys that litigate these cases to come up with a proper conclusion.

Just because they don't have the wealth of case laws like the IRS has.

So it's a little trickier to do it there in some countries.

Module 7 Introduction

Accounting Analysis II: Measurement and Disclosure of Liabilities

Meet the Instructors