Question
Acme Corp. , a calendar-year-end company, has multiple uncertain tax positions (UTPs) related to its 2018 federal tax return. Some UTPs met the more-likelythan-not recognition
Acme Corp. , a calendar-year-end company, has multiple uncertain tax positions (UTPs) related to its 2018 federal tax return. Some UTPs met the more-likelythan-not recognition threshold on the basis of 3D Printing's initial assessment while others did not. During 2019, the IRS audited the 2018 tax return. During Q3 2019, the examining agents verbally indicated the preliminary conclusion on certain UTPs, and the IRS and Acme formalized their agreement on these UTPs by signing IRS Form 906, "Closing Agreement on Final Determination Covering Specific Matters," in Q4 2019. Subsequently, in Q1 2020, the IRS completed its examination of the 2018 tax return whereby the IRS and Acme agreed to the final closing agreement. Acme does not intend to appeal or litigate any aspects of the examined UTPs, and it is remote that the IRS would examine or reexamine any aspects of the 2018 federal tax return. Refer to the table below for further facts on each of the UTPs.
Met
Recognition
Threshhold?
Amount of Tax BenefitLiability Recognized
in the
Financial
Statements*
Specifically
Examined?
Verbally
Communicated
In Q3?
Listed on
Q4 Form
906?
Benefit
Sustained**
UTP 1
Yes
60%
Yes
Yes
Yes
40%
UTP 2
No
0%
No
No
No
?
UTP 3
Yes
20%
Yes
No
Yes
100%
UTP 4
Yes
65%
Yes
Yes
No
50%
UTP 5
Yes
70%
No
No
No
?
UTP 6
No
0%
Yes
No
Yes
100%
Required:
1. For each tax position taken on its 2018 federal tax return:
a. When can Acme assert an "effective settlement"?
b. When should Acme adjust previously recognized amounts in the financial statements, if any?
2. Does Acme have a basis to change its assessment of similar tax positions taken in other periods if it concludes it meets the effective settlement conditions related to the UTPs included in its 2018 tax return?
Provide authoritative support for positions taken.
* Represents the amount of the tax benefit liability from the UTP the company recognized.For example, if the UTP resulted in a decrease of $100,000 to the overall tax liability and 70% of the benefit was recognized, the company recorded a $70,000 liability associated with the UTP assuming a liability would be recognized.
** Represents the percentage of the benefit taken under the UTP that the IRS allows after audit.For example, if the UTP reduced the total tax liability by $100,000 and the IRS allows 70% of the UTP, Acme would owe an additional $30,000 in taxes as a result of the audit. This amount is unknown if the IRS has not completed their audit of the UTP.
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