Schedule UTP Guidance for Preparing Concise Descriptions

 

Concise Descriptions:

During the review of Concise Descriptions disclosed on Schedule UTP filed with 2011 tax returns, the IRS identified problems with the quality of the content of some disclosures.  Since those early filings, the concise description quality issues continue to be present.  Below are the instructions provided for 2011 and subsequent year tax returns.

Instructions for preparing Concise Descriptions:

“Provide a concise description of the tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the IRS of the identity of the tax position and the nature of the issue. In most cases, the description should not exceed a few sentences. Stating that a concise description is “Available upon Request” is not an adequate description.”
“A concise description should not include an assessment of the hazards of a tax position or an analysis of the support for or against the tax position.”

Concise Descriptions that do not clearly identify the taxpayer’s tax position and do not provide sufficient relevant facts to apprise the IRS about the nature of the issue do not meet the requirements of the instructions. 
The following are hypothetical examples of the types of concise descriptions that do not meet the requirements set forth in the instructions for Schedule UTP:

  • This issue is under audit for a prior year.
  • This issue is one for which we have recorded a reserve because it was unresolved in prior years and is currently in Appeals.
  • This is an issue for which we have recorded a reserve because the appropriate tax treatment of this position is unsettled.  We are awaiting published guidance and we are awaiting the outcome of pending litigation.
  • This is an issue that we know is subject to IRS scrutiny.
  • This issue relates to how we have characterized certain expenditures and related deductions.

These hypothetical concise descriptions do not provide relevant facts affecting the tax treatment of the item.  In addition, these descriptions do not identify the tax position and the nature of the issue as provided for in the instructions for Schedule UTP.
The table below shows examples of hypothetical insufficient and sufficient concise descriptions.  The insufficient concise descriptions identify a tax issue, but do not provide the relevant facts affecting the tax treatment of the item and insufficiently describe the nature of the issue.  Examples of sufficient concise descriptions for these issues that meet the requirements of the instructions for Schedule UTP are also displayed in the table.

Example
Number
Insufficient Concise Description Sufficient Concise Description
 1 This is a research credit issue. The taxpayer produces surgical joint replacement parts for the medical field. During tax year 2021, the taxpayer incurred employee wages, contract labor, and supply expenses in connection with the design and development of a new and innovative business component for increasing the effectiveness of hip replacement surgery. Employee wages for qualified services in the amount of $1,000,000 were reported on line 4 of Form 6765, the applicable percentage of contract research expenses in the amount of $600,000 were reported on Form 6765, line 8, and qualifying supply expenses in the amount of $400,000 were reported on Form 6765, line 6.  There is uncertainty on whether the product design activity for the hip replacement part is considered qualified research under Section 41 of the Internal Revenue Code and the regulations thereunder.
 2 This is a transfer pricing issue. The taxpayer receives royalty payments from its foreign subsidiary, XYZ, Ltd, for the use of intellectual property owned by the taxpayer. The foreign subsidiary, located in country Y, pays the taxpayer a royalty of 5% of the sales generated from the intellectual property.  On line 7 of its 2021 From 1120, the taxpayer reported $2,000,000 in royalty income from XYZ, Ltd.   The taxpayer considers the royalty income to be arm’s length, as it falls within the reasonable range for similar transactions of comparable companies based on a professional consulting firm’s transfer pricing study.  The issue is whether the taxpayer's royalty rate is acceptable to the IRS. 
 3 The issue is whether the amounts reported are deductible in the tax year claimed. The taxpayer claimed a deduction for accrued professional and accounting fees on line 26 of its 2021 Form 1120.  Although the services had not been provided by the end of tax year 2021, the amount of the $500,000 expense for ZZZ Accounting’s tax preparation services could be determined with reasonable accuracy.  The taxpayer treated the expense as incurred during the 2021 tax year for financial reporting purposes. The Uncertain Tax Position is the permissibility of a deduction on the 2021 tax return for the accrued professional fees.
 4 The taxpayer incurred costs during the year that are deductible as ordinary and necessary business expenses under IRC Section 162.  The taxpayer claimed a deduction for travel and entertainment expenses incurred by the marketing department employees for sales meetings and product promotion.  The deduction in the amount of $300,000 was reported on line 26 of Form 1120.  The uncertain tax position issues are whether adequate documentation is available to substantiate the deductions claimed and whether a portion of the expenses constitute meals and entertainment subject to a 50% limitation.