A Different Approach for Drafting Form UTP Disclosures
William S. Garofalo
Federal - 5/15/2012

Based on anecdotal evidence (including presentations at educational programs and discussions at networking sessions), the prevailing approach for disclosing “uncertain tax positions” on IRS Form UTP is to provide as little information as possible and not to spend much time in drafting them. This article suggests that a different approach may often be better.

Form UTP is a deceptively simple form. The 2011 form requires corporate taxpayers with assets of more than $100 million[1] to report issues for which tax reserves have been accrued under ASC 740 (formerly FAS 109 or FIN 48). In addition, taxpayers must report tax issues for which there is no reserve, based on the taxpayer’s position that it will litigate the potential issue.

The form has been substantially slimmed down from its more intrusive beginnings. On page 1, the taxpayer provides a list of the issues being disclosed. Pages 2 and 3 require a concise description of the issues; page 2 covers disclosures for prior years and page 3 the current year disclosures. The instructions provide that “[i] n most cases, the description should not exceed a few sentences.” The instructions also direct that “[t]he concise description should not include an assessment of the hazards of the tax position or an analysis of the support for or against the position.”[2]

Very simple. As simple as the iceberg that sank the Titanic. Taxpayers need to exercise care with Form UTP, because a well-drafted disclosure may prevent a great deal of future pain.

The key to drafting form UTP disclosures is to identify the audience and what you want the audience to do. The audience for Form UTP, of course, is (at least in part) the Internal Revenue Service. But who at the IRS? The current IRS practice is to have all returns containing form UTP reviewed by the “Centralized Review Team” before any agent is given access to the return.[3] The use of a centralized team allows the IRS to understand the UTP data and make centralized audit and resource allocation decisions. Interestingly, the IRS currently does not circulate UTP disclosure information to Chief Counsel branches (in the National Office) or Industry Practice Groups (IPGs).

In the first UTP filing season for tax year 2010, more than 400 CIC[4] and 1500 non-CIC taxpayers filed Form UTP. The CIC taxpayers reported an average of 3.1 issues on each form UTP. Non-CIC taxpayers reported an average of 1.9 issues. In total, taxpayers reported 4,186 issues. Transfer pricing accounted for 21 percent of the issues (approximately 880 reports). Research credits and business deductions were the other largest issues in terms of numbers of reports.[5] For tax year 2011, these numbers should increase, since taxpayers will be reporting both 2011 exposures and newly discovered 2010 reserves. For 2013 and 2014, the number of reported issues should go up further, since the threshold for taxpayers required to file Form UTP decreases from $100 million in assets to $50 million and $10 million dollars respectively. This trend should continue if the IRS finds the Form UTP disclosures helpful and expands the application of the form to partnerships and other entities (or reduces the asset threshold further).

The IRS lacks the resources to fully examine every issue reported on Form UTP and every taxpayer filing the form. For example, the IRS cannot realistically assign an IRS economist (who currently number less than 100, including Advance Pricing Agreement program and similar program workers) to review every one of the nearly 900 disclosed transfer pricing issues. The Centralized Review Team and the UTP review process are critical to making resource allocation decisions, including whether the IRS will examine non-CIC taxpayers or assign specialists or teams to Form UTP issues. Based on the team’s work, some Form UTP issues and taxpayers either will not be examined or will receive less scrutiny than others.

In some cases, a taxpayer can reduce its audit exposure through the proper drafting of Form UTP issue descriptions. For a large CIC taxpayer that is routinely being examined every year, the assignment of specialists or a thorough review for some reported UTP issues may be avoided. For a smaller LB&I case, also known as an IC (Industry Case),[6] the taxpayer may be able to avert an examination despite a Form UTP disclosure.

So what does a taxpayer tell its audience (the IRS) to get it to do as it desires? And what do the Form UTP instructions require the taxpayer to disclose?

On page 1 of Form UTP, taxpayers must list issues, the most relevant sections of the Internal Revenue Code, whether the issues are temporary or permanent, their rank on the UTP list, and a little other basic information. Then, on pages 2 and 3, taxpayers must disclose the real substance, namely a few sentences “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.”[7]

These instructions reflect a substantial narrowing of the disclosure requirements. In Announcements 2010-75 and 2010-76, the IRS announced that it would forgo earlier an earlier proposal requiring disclosure of the maximum possible adjustment for an issue, the rationale for the uncertain position, and nature of the uncertainty; it also announced that it would refrain from seeking workpapers for FIN 48/ASC 740 in most circumstances. (The IRS consistently disclaimed any intention to seek the actual amount of the reserve, or percentage of the total issue that was reserved.)

With the narrowing of the requirement, Form UTP disclosure can be terse and limited without running afoul the IRS. This as-littleas- possible information approach seems to have been adopted by many taxpayers. In fact, the IRS contacted 133 taxpayers — almost seven percent of the total that filed Form UTP — concerning disclosures on Form UTP that did not even meet the low disclosure threshold in the form instructions.

Why Less May Not Be Better

But will “terse and limited” always be in the best interest of the taxpayer? Will it allow the taxpayer to tell the audience what the taxpayer wants this audience to hear?

Consider this example: A U.S manufacturer (M) sells goods to related foreign company F1 and has an ASC 740 income tax reserve related to transfer pricing. Form UTP requires disclosure of the transfer pricing issue. Maybe the less said, the better. In other words, the company should keep the description of the issue to one or two sentences, such as —

M sells goods to related foreign entities. M has a tax reserve with respect to the transfer pricing of these goods.

That would be a pretty limited description. Concise to the T. But before going down that path, a taxpayer should consider whether there are further facts that can be disclosed that might forestall an examination of an issue altogether or, alternatively, the assignment of an economist to case. Thus, disclosing additional facts might further the taxpayer’s goal of avoiding examination or reducing the intensity of the examination of the issue. Some possible ameliorative facts would be the following:

  • The taxpayer’s justification for its transfer pricing;
  • The existence of a transfer pricing study and some relevant findings from that study (for instance, the taxpayer’s quartile result from a CPM analysis);
  • The foreign company’s location in a high-tax jurisdiction or other facts suggesting a lack of profit shifting motive;
  • The lack of a tax reserve because the taxpayer believes it would prevail in litigation;
  • The small amount of the tax reserve;
  • The existence of relevant court or other authorities supporting the taxpayer’s position;
  • Previous IRS examination findings for this issue; and
  • The taxpayer’s strong belief in the correctness of its position or its having accrued only a small percentage of the total price because to the uncertainties of transfer pricing.

None of these (or similar) facts is required by the Form UTP instructions. In fact, the instructions expressly state that the taxpayer should not provide such facts: “The concise description should not include an assessment of the hazards of the tax position or an analysis of the support for or against the position.”[8]

That said, disclosure of these facts, or similar favorable information, might prompt the IRS not to examine the 2011 return or assign a specialist to the examination.

Sometimes, of course, the less said, the better. Perhaps the taxpayer should let the IRS wonder whether this is a good issue to examine, rather than to confirm it. Often, however, there may be favorable information that might alter an IRS examination plan decision to the taxpayer’s benefit. The preparer of the Form UTP should consider whether a more liberal disclosure will benefit the taxpayer, even if not required by the instructions. Maybe more than a few terse sentences, even a half page or a whole page of discussion, will deter IRS attention.

The goal is not to create a “haystack” so the UTP reviewers cannot find the “needle.” Rather, it is to demonstrate that there is no needle to be found. Three additional points merit consideration:

  • The IRS is not going to ask a taxpayer to redo its form UTP or penalize it because information is provided that goes beyond that required by the form instructions.
  • If the IRS examines this issue, the taxpayer will likely provide the favorable information anyway, so there is no strategic advantage to holding back the information.
  • While the taxpayer should consider attorney-client privilege and possible waiver issues, simply providing the amount of an ASC 740 reserve most likely does not waive any privileged advice underlying the reserve.[9]

Other Audiences

The IRS income tax examiners are the obvious audience for Form UTP, but there are other audiences. California requires disclosure of the federal form with its returns.[10] Other states will either obtain the federal form from the IRS or from the taxpayer. And other countries may see the form.[11] Even IRS examiners for other types of taxes, such as payroll, excise, or withholding tax, may look at it. The Form UTP may be of no use to these audiences. It may be of great use. Or it may lead them astray.

The preparer of Forms UTP should be aware of these other potential audiences and consider how to address their concerns. For example, a transfer pricing issue may be of no import for state purposes, because of the formulaic income apportionment rules. The preparer of Form UTP may want to mention this, either in the form itself or an attachment. Of course, a discussion of state tax issues is clearly not called for by the Form UTP instructions. But what is the IRS going to do about extraneous discussion (from its point of view)? Send the form back with a note telling you not to do it again? There is no penalty for extraneous or extra discussion in Form UTP.


  • Determine the audience(s) for Form UTP.
  • Tell the audience(s) what will move the case in the direction the taxpayer wants it moved.
  • Do not hew to those instructions that limit disclosure, if more information is to the taxpayer’s benefit. Tell the IRS and other potential audiences why devoting resources to an examination of this issue will not be in their best interest.

William (“Willie”) S. Garofalo is a vice president at Swiss Re America Holding Corporation, with responsibility for federal and state tax controversies as well as transfer pricing. Previously, he was counsel in the New York office of Baker & McKenzie and a Special Litigation Assistant with the IRS Office of Chief Counsel. A member of Tax Executives Institute, he is also vice president of its Westchester-Fairfield Chapter. Mr. Garofalo received his undergraduate degree from Union College, his J.D. degree from Case Western University School of Law, and his LL.M. (Taxation) degree from New York University. He has more experience with Form UTP than he would prefer. He may be contacted at william_garofalo@swissre.com.



1. See IRS Announcements 2010-9, 2010-30, 2010-75, and 2010-76.
2. 2011 Form UTP, at page 5.
3. See November 1, 2011, memorandum for Large Business and International Division (LB&I) employees from Heather Maloy, Commissioner, LB&I Division, concerning UTP guidance and procedures for the field, available at the IRS website and at 2011 TNT 212-17.
4. CIC stands for “Coordinated Industry Case,” a program involving the examination of the largest and most complex taxpayers examined by the IRS. Most CIC cases are examined for every tax year.
5. This data are from the remarks of Steven T. Miller, IRS Deputy Commissioner, Service and Enforcement, Before the Tax Executives Institute, Midyear Conference (March 26, 2012), as reported on the IRS website and various other sources.
6. See irs.gov, case classification for LB&I, or IRM 4.46.2.
7. 2011 Form UTP instructions, at pages 4-5.
8. 2011 Form UTP instructions, at page 5.
9. Moreover, the IRS has stated that it will exercise restraint in respect of requests for tax accrual workpapers. See IRS Announcements 2010-75 and 2010-76.
10. See instruction booklets for California Forms 100 and 100W.
11. But see Announcement 2010-75, which indicates that foreign disclosures may be limited.