Smart Business spoke with Paul Etzler, a senior manager with Skoda, Minotti & Co., to learn more about FIN No. 48 and its effects on corporate tax positions.
Who must comply with FIN No. 48?
Every organization that issues financial statements in accordance with U.S. generally accepted accounting principles (GAAP) must consider the impact of FIN No. 48 for disclosure, and possibly adjustment, to their financial statements. Nonprofits, regulated industries and pass-through entities are not exempt. The same standards for considering and reporting FIN No. 48 apply to public and nonpublic companies. Moreover, subsidiaries that do not file a separate federal return but issue a GAAP financial statement need to comply with FIN No. 48 requirements.
What taxes must be considered?
FIN No. 48 includes all taxes levied on income for any jurisdiction — local, state, federal or international. However, FIN No. 48 does not include consideration of other taxes that the organization may pay, such as taxes on net worth, activity or privilege taxes, sales, and real and personal property taxes. The organization must still be cognizant of potential liability and uncertainty related to such taxes, in accordance with existing guidelines.
The potential effect of complying with FIN No. 48 is a liability on the balance sheet. How is this calculated?
Once all tax positions are identified and analyzed, then a mathematical calculation determines the amount of liability; that is, an estimate of the amount that the organization would need to raise if the taxing authority won and it lost. In addition to this estimate of potential liability, the organization must calculate penalties and interest on the liability and add that to the total. Thankfully, litigation costs and professional fees need not be estimated and added to the liability.
How does FIN No. 48 affect state tax issues?
FIN No. 48 forces the organization to evaluate tax positions taken on its tax returns for all ‘open years.’ The statute of limitations is generally three years. However, the statute of limitations clock does not start ticking until the tax return is filed. Therefore, nonfiling in a particular jurisdiction may go back several years (or decades, for that matter). This causes the organization to take another hard look at ‘nexus’ issues, that is, the organization’s activity in each state.
What is the effect of these disclosures in an organization's financial statements when dealing with the IRS?
FIN No. 48 has been called the ‘roadmap for the IRS.’ Whether due to errors, poor judgment or aggressive tax planning, the accountant must assess — and the independent auditor audit — the possibility that a tax position will be challenged by the taxing authority and the probability of losing the battle. This assessment and auditing of the assessment needs to be fully disclosed on the organization’s financial statements.
How often does the organization need to assess its tax positions?
Commensurate with issuing each financial statement, the organization must address any changes to the circumstances surrounding a tax position. Any change must be new information, not a reconsideration of old information. The most likely reasons for having new information include a settlement with a taxing authority, expiration of statute of limitations related to the return or the increase in the certainty that a tax position will be upheld. It is important to remember that case law and interpretations change all the time. The organization is responsible for addressing such changes as they pertain to its tax positions.
What can a business owner do to understand and comply with these new guidelines?
As with most new pronouncements or regulations, the first year of implementation is the most difficult, but help is available. Public accountants and consultants have put together several Q&As and have addressed a multitude of scenarios to help small business owners.
We suggest beginning the investigatory process now. Any interim and quarterly financial reporting must include the full impact of FIN No. 48. Additionally, if certain tax positions are evaluated as uncertain, then the organization can act now to avoid potential liability from the taxing authority.
PAUL ETZLER, CPA, is a senior manager with Skoda, Minotti & Co., a CPA, business and financial advisory firm, based in Mayfield Village. Reach him at email@example.com or (440) 605-7150.