Tax controversies refer to disputes between taxpayers and tax authorities regarding the interpretation or application of tax laws and regulations. These controversies can arise from various factors, including differences in interpretation, tax planning strategies, accounting treatments, and compliance with tax laws. Here's a detailed overview of accounting for tax controversies:

1. **Identification and Assessment:** The first step in accounting for tax controversies is identifying and assessing potential tax issues or disputes that may arise during the preparation and filing of tax returns. This involves reviewing tax laws, regulations, and interpretations to ensure compliance and identify areas of potential disagreement with tax authorities.

2. **Evaluation of Uncertain Tax Positions (UTPs):** Taxpayers are required to evaluate uncertain tax positions (UTPs) and determine the likelihood of their acceptance by tax authorities. Uncertain tax positions arise when there is uncertainty regarding the tax treatment of certain transactions or events. Taxpayers must assess the probability of sustaining their position upon examination by tax authorities and determine the appropriate accounting treatment.

3. **Accrual of Tax Liabilities:** Taxpayers are required to accrue tax liabilities for UTPs based on the likelihood of their resolution in favor of tax authorities. This involves estimating the potential tax impact and recording a provision for taxes payable or a liability for unrecognized tax benefits in the financial statements. The accrual of tax liabilities ensures that financial statements reflect the potential tax consequences of unresolved tax issues.

4. **Disclosure Requirements:** Accounting standards, such as ASC 740 (US GAAP) and IAS 12 (IFRS), require taxpayers to disclose information about uncertain tax positions, including the nature of the issue, the amount of potential tax exposure, and the reasons for the uncertainty. Disclosure of UTPs provides transparency to financial statement users and enables them to assess the potential impact of tax controversies on the entity's financial position and performance.

5. **Resolution of Tax Disputes:** Tax controversies are typically resolved through negotiation, settlement, or litigation with tax authorities. Taxpayers may engage in discussions with tax authorities to reach a mutual agreement on disputed tax issues, enter into settlement agreements, or pursue legal remedies through administrative or judicial proceedings. The resolution of tax disputes may result in changes to tax liabilities and require adjustments to financial statements.

6. **Subsequent Events Disclosure:** Taxpayers are required to disclose any significant developments or changes in tax positions subsequent to the reporting period that may affect the outcome of tax controversies. This ensures that financial statement users are informed about material changes in tax exposures and liabilities subsequent to the end of the reporting period.

**Question:**

In accounting for tax controversies, taxpayers are required to evaluate uncertain tax positions (UTPs. determine the likelihood of their acceptance by tax authorities.