FIN 48 Developments

The IRS has released two internal documents regarding FIN 48. The first, a May 10, 2007 Memorandum from LMSB Commissioner Deborah Nolan, provides general information to LMSB executives, managers and examiners regarding the IRS’s current policies and possible future developments regarding FIN 48. The Memorandum confirms IRS Chief Counsel’s opinion that FIN 48 Workpapers are Tax Accrual Workpapers subject to the IRS’s current policy of restraint. Under the current policy of restraint, the IRS will not request Tax Accrual Workpapers from a taxpayer unless certain defined circumstances exist (e.g., if the taxpayer does not disclose a transaction the IRS has listed as a potentially abusive tax shelter). It also announces the creation of an LMSB Tax Accrual Workpapers Cadre whose members will assist examiners in requests for Tax Accrual Workpapers under the policy of restraint, a new requirement for six hours of Continuing Professional Education regarding FIN 48, the release of an Audit Field Guide, and provides another reminder that the IRS is reviewing and reconsidering its current Tax Accrual Workpaper policy of restraint.

The second document is the Audit Field Guide referenced in Ms. Nolan’s Memorandum. The Field Guide describes the general FIN 48 process for identifying and accounting for uncertain tax positions and poses 10 questions and answers about how examiners should deal with the new accounting standard and the disclosures there under. The Questions and Answers provide interesting insights into what the IRS is thinking about the FIN 48 process. For example, in answer to the first question, “Are FIN 48 Disclosures a Roadmap for the IRS?,” the Field Guide acknowledges that FIN 48 footnote disclosures in financial statements may not specifically identify issues, but it nevertheless encourages examiners to seriously consider the disclosures in their examination planning process. It encourages examiners to not be reluctant to pursue mat- ters mentioned in FIN 48 disclosures, while still being mindful of the current Tax Accrual Workpaper Policy of restraint. What this may mean, practically speaking, is that IRS examiners may issue broad Information Document Requests (IDRs) that are driven by FIN 48 disclosures but do not expressly ask for audit workpapers relating to the issue. As an example, the Field Guide suggests that if a taxpayer discloses a FIN 48 liability concerning Subpart F income but does not reflect any Subpart F income on its return, IDR questions should be issued requesting an explanation.