LB&I Schedule UTP Guidance
This guidance provides LB&I examination teams with requirements and procedures that are to be followed when reviewing and using the Schedule UTP in conjunction with their examination. Schedule UTP guidance related to 2010 CAP returns has already been provided.
This memorandum also requires LB&I personnel to complete a Just-in-Time UTP CENTRA training session and the pre-requisite tax reserve training before reviewing a return that includes a Schedule UTP or examining an issue disclosed on a Schedule UTP. This requirement applies to examiners and specialists and their respective team and territory managers.
Centralized Review Process
Prior to the release of returns that contain a Schedule UTP to the field, a Centralized Review Team will review and evaluate the Schedule to assess compliance with the Schedule UTP instructions. In instances where information contained on the Schedule UTP is deemed not to have met the requirements of the instructions, the Centralized Review Team will contact the taxpayer. As such, when returns with a Schedule UTP are assigned to the field, examiners and/or specialists should not take any further actions to evaluate or ensure compliance of the Schedule with the UTP instructions. If questions arise about the adequacy of the concise descriptions, please send your question to UTP.
Schedule UTP in the Audit Process
- The Schedule UTP is a tool to be used in conjunction with our Quality Examination Process (QEP) that covers exam planning, execution and resolution procedures and processes.
- When a return with a Schedule UTP is assigned, the LIN link will be provided along with a case insert that will outline administrative procedures and the Schedule UTP project and tracking codes. If a return is received with a Schedule UTP attached that does not contain the case insert, agents or managers should contact the PAIR UTP PSP Coordinator.
- When auditing a return with a Schedule UTP, examiners should conduct the risk analysis and planning activities consistent with Achieving Quality Examinations through Effective Planning, Execution and Resolution, the Quality Examination Process Reference Guide, and IRM 4.46.
- The examination of a return with a Schedule UTP is not mandatory. The presence of the Schedule UTP should, in and of itself, not be the sole factor used to determine whether or not to proceed with an examination.
- As with any issue identified for potential examination, the decision to select an issue for audit is contingent upon the findings from the risk analysis, discussions with the taxpayer, materiality considerations, and other steps outlined in the Planning phase of the QEP. Therefore, examiners should apply regular procedures to a return containing a Schedule UTP when determining whether to examine an issue or the return and/or whether to decide to survey a return after assignment.
- The involvement of the examiners and specialists with their respective managers is crucial in the proper issue identification:
- The team and specialist manager should notify the examiner or specialist and their respective territory managers to alert them of the assignment of a return with a Schedule UTP.
- The team coordinator must add a comment on the Specialist Referral System (SRS) that the return has a Schedule UTP attached.
- All territory managers must be involved in team discussions during the pre-exam analysis when there is a Schedule UTP. These discussions should take place before meetings begin with the taxpayer.
- The territory manager’s subsequent level of involvement will vary for each case depending on factors such as the nature of the issues disclosed on the Schedule UTP, the relationship with the taxpayer, audit history, etc.
- The same rules and procedures contained in the QEP Reference Guide regarding the issuance of IDRs apply to returns with Schedule UTP. The purpose of an IDR will be plainly stated identifying the issue, and the IDR will be appropriately focused to ensure that information requested and/or questions asked add value to the identification and resolution of an issue.
- For issues that are disclosed on the Schedule UTP, the team may ask the taxpayer for information about the relevant facts affecting the tax treatment of the position and information about the identity of the tax issue. The team cannot ask the taxpayer to explain their rationale for determining that the issue was uncertain, or for information about the hazards of the position or an analysis of support for or against the tax position.
- The team cannot ask the taxpayer why a Schedule UTP issue is uncertain, nor can the team ask the taxpayer for copies of workpapers used to prepare Schedule UTP, any Tax Accrual Workpapers, or for any documents privileged under the modified policy of restraint.
- The fact that an issue disclosed on the Schedule UTP was present on a prior year audit is not sufficient to automatically roll over an issue from one year to the next. The examiner should review the issue in the current year, verify the facts, and determine whether the issue merits examination.
- The fact that an issue disclosed on a 2010 Schedule UTP is selected for examination is not sufficient to automatically raise the issue in a prior year whether or not that prior year is already under examination. In fact, as part of a regular examination, it is unusual to open an issue in a prior year, especially if the examination has reached the resolution phase of QEP. In most situations, the case would be closed as planned, and a determination made as to whether the issue should be addressed in the subsequent year based on the risk analysis and materiality.
- However, if during the planning or execution phase of QEP, a team thinks that an issue disclosed on the Schedule UTP should be addressed in a prior year that is under examination, the approval of the team manager is required before the issue is included in the audit plan or a discussion occurs with the taxpayer. Further, if the team thinks that an issue disclosed on the Schedule UTP should be addressed in a prior year not under examination, the approval of the team manager is required to order a prior year return. The involvement of the territory manager will vary depending on the nature of the issues disclosed on the Schedule UTP, the relationship with the taxpayer, audit history, etc.
- When a Schedule UTP is attached to the return, but no issues are disclosed:
- The team should check line 14 of Form 1120 Schedule K and determine whether the taxpayer answered “yes” or “no” to the question which asks whether the corporation is required to file Schedule UTP.
- If the taxpayer has answered “no” on Line 14 of Schedule K and signed the tax return under penalties of perjury, the team may ask the taxpayer to confirm that there are no issues to be disclosed according to the Schedule UTP reporting requirements. The team can also advise the taxpayer that a Schedule UTP is not required when there are no positions to report. (See: UTP FAQ #5 issued in July 2011 and available on irs.gov).
- If the taxpayer has answered “yes” on Line 14 of Schedule K and signed the tax return under penalties of perjury, the team should ask the taxpayer to provide a revised Schedule UTP, following the Schedule UTP instructions.
- If the taxpayer’s financial statements reflect an increase in reserves, but the filed return did not include a Schedule UTP:
- The team cannot ask the taxpayer about the makeup of the reserves.
- The team may only ask the taxpayer to confirm that there are no issues to be disclosed according to the Schedule UTP reporting requirements. The increase in reserves could relate to either (i) state, local or foreign reserves, or (ii) a pre-2010 tax position, neither of which must be reported on the Schedule UTP.
- As with any issue raised on an examination, when a Schedule UTP issue is audited and the audit results in a proposed adjustment (NOPA), the team should:
- Discuss with the taxpayer the issue associated with the proposed adjustment and confirm the facts of the issue in question,
- Clarify the taxpayer’s position,
- Ensure open collaboration and consultation has occurred in the issue development process with involvement of subject matter experts, management and Counsel as appropriate.
- Ensure that the principles of plain writing have been used in stating the government’s legal position(s) and the taxpayer’s position.
UTP Feedback Process
In implementing the new UTP reporting requirement, it is important for LB&I to learn as much as possible about the usefulness of the UTP schedules in the exam process. Feedback will be collected following the approval of the audit plan. An opportunity for additional feedback may be provided at the conclusion of the examination of returns that included a Schedule UTP.
For further guidance or technical information about Schedule UTP and the modified policy of restraint, see:
- Announcement 2010-75
- Announcement 2010-76
- LB&I Commissioner Memorandum dated March 23, 2011 on the Modified Policy of Restraint.
- LB&I Commissioner Memorandum dated May 11, 2011 on the Centralized Management of LB&I Returns with UTP Schedules.
- LB&I Commissioner Memorandum dated August 31, 2011 on UTP Guidance and Procedures for the Compliance Assurance Process (CAP) Program.