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 tax year 2022 and subsequent year filings. Instructions for preparing concise descriptions For Schedule UTP to be considered complete, the corporation must include a description of the relevant facts affecting the tax treatment of the position and information that can reasonably be expected to apprise the IRS of the identity of the tax position, and the nature of the issue for which the tax position is being disclosed. A “description of the relevant facts affecting the tax treatment of the position” should include all information pertaining to the nature of the uncertainty related to the tax position. For example, if a corporation's tax position is to claim a current year deduction for the cost of fixing the roof of a building, the description should indicate why it was determined that the work was performed to keep the asset in normal operating condition and why the costs do not improve or extend the useful life of the asset. The “identity of the tax position” should provide information that further defines the primary IRC section(s), rule, or regulation section listed in Parts I and II of Schedule UTP, such as the identification of a 15-year depreciable life assigned to land improvement assets under section 168 or indicating that a request has been filed in accordance with Rev. Rul. 90-38 to change from an erroneous method of accounting for advanced payments. Information concerning “the nature of the issue for which the tax position is being disclosed” can include a factual description of the legal issues presented. It should identify, for example, the specific entity, country, or transaction to which the tax position relates, the character of income, the type of expense or credit, the relationship of the tax position to other assets or activities, and whether the uncertainty relates to computational issues, substantiation issues, sampling methodologies, or legal interpretation. 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 do not 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 an advanced prosthesis for increasing the effectiveness of hip replacement surgeries. There is uncertainty as to whether the supervisorial wages included in the $1,000,000 deduction reported on Form 6765, line 5, are qualified research expenses and whether perfecting the prosthesis patent constitutes a qualified research activity under Section 41 of the Internal Revenue Code and the regulations are 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. The taxpayer included the XYZ royalties on line 7 of its 2021 From 1120, where it reported $2,000,000 in gross royalties. 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 $1,000,000 deduction for 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 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 and accounting fees payable to ZZZ. 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. A deduction in the amount of $1,000,000 was reported for travel and entertainment expenses on line 26 of Form 1120. The uncertain tax positions 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.
