UTP Guidance and Procedures for the Compliance Assurance Process (CAP) Program

August 31, 2011

In May, I issued a memorandum outlining initial LB&I procedures for implementing the new Schedule UTP. The purpose of this memorandum is to transmit the attached guidance covering the use of Schedule UTP as part of the CAP Program. This guidance applies only to CAP returns filed for the 2010 tax year by CAP taxpayers that were in CAP in 2010. Additional guidance and procedures applicable to all other LB&I examinations is being developed by the UTP Internal Guidance and Procedures team and will be issued at a later date.

Tax returns filed for the 2010 tax year by taxpayers that were in CAP in 2010, that include a Schedule UTP, will be released to CAP teams shortly after filing.  CAP Account Coordinators may also receive a copy of these returns from their taxpayer to facilitate the post-filing review process.  In either case, teams must follow the guidance outlined in this memorandum.

LB&I’s Pre-Filing and Technical Guidance (PFTG) organization will be holding a mandatory CENTRA session for all CAP teams to review this guidance and answer any questions.  The CENTRA session has been scheduled for all CAP team members on September 15, 2011, from 3:00 - 4:00 pm EDT.  PFTG will forward a CENTRA invitation to all CAP team members, and the session will be recorded for those unable to attend.

The enactment of the UTP reporting requirement was a significant milestone for the IRS, and it is important that our implementation and use of the information is consistent with the expectations and framework set forth in this and other UTP notices and directives.  I appreciate your support and assistance in helping LB&I achieve those objectives as we move forward in implementing UTP.

If you have any questions regarding this guidance covering the application of the Schedule UTP as part of CAP, you may contact Maria B. Dolan, Senior Progam Manger, (813) 367-8475. 

Attachment: CAP UTP Guidance
 
 

LB&I SCHEDULE UTP GUIDANCE FOR THE COMPLIANCE ASSURANCE PROCESS (CAP) PROGRAM

This guidance provides CAP teams with requirements and procedures that are to be followed when reviewing and using the Schedule UTP in conjunction with CAP.

This guidance only applies to tax year 2010 returns for CAP taxpayers that were in CAP in 2010.

Tax returns for the 2010 tax year filed by taxpayers that were in CAP in 2010, that include a Schedule UTP, will be released to CAP teams shortly after filing.

Before reviewing the Schedule UTP or examining an issue disclosed on the schedule, however, the CAP team must participate in the mandatory CENTRA CAP UTP session. This requirement extends to the team manager and territory manager of both domestic and specialist examiners.

Review of Schedule UTP

During the post-file period, the team should follow existing CAP guidance in reviewing the return.  The issues listed on the Schedule UTP should be considered and compared to the list of taxpayer disclosures made during the CAP year.  Depending on the result of this review of the Schedule UTP, the CAP team should take the following actions:

1. If the tax return includes a Schedule UTP but no issues are disclosed:

a. The team should check line 14 of the Form 1120 Schedule K and determine whether the taxpayer answered “yes” or “no” to the question which asks whether the corporation is required to file Schedule UTP.
b. If the taxpayer has answered “no” on Line 14 of Schedule K and signed the tax return under penalties of perjury, the team may ask the taxpayer to confirm that there are no issues to be disclosed according to the Schedule UTP reporting requirements. The team can also advise the taxpayer that a Schedule UTP is not required when there are no positions to report. (See: UTP FAQ #5 issued in July 2011 and available on irs.gov) 
c. If the taxpayer has answered “yes” on Line 14 of Schedule K and signed the tax return under penalties of perjury, the team should ask the taxpayer to provide a revised Schedule UTP, following the Schedule UTP instructions.

2. If the Schedule UTP describes an issue that was disclosed to the team, was reviewed during the CAP year, and is either unagreed or being examined in the post-file period:

a. The team should discuss the issue with the taxpayer to confirm it is the same issue and/or transaction and that there are no new facts or information to consider. 
b. If it is not the same issue and/or transaction or there are new facts or information to consider, the team should consult with the Director, Field Operations to determine the appropriate treatment.
c. The team should continue with the CAP plan, examining the issue if required, in the post-file period, and otherwise working to complete all other post-filing activities.

3. If the Schedule UTP describes an issue that was disclosed to the team, and the team decided not to pursue it:

a. The team should discuss the issue with the taxpayer to confirm it is the same issue and/or transaction and that there are no new facts or information to consider. 
b. If it is not the same issue and/or transaction or there are new facts or information to consider, the team should consult with the Director, Field Operations to determine the appropriate treatment.
c. If it is the same issue or transaction and there are no new facts or information, the team should not pursue the issue and should continue with the CAP plan, working to complete all other post-filing activities.

4. If the Schedule UTP describes an issue that the team believes was not disclosed during the CAP year:

a. The team should have a preliminary discussion with the taxpayer regarding the issue and why it was not disclosed during the tax year.
b. The team must discuss the non-disclosure with the Director, Field Operations to determine the appropriate treatment. The DFO will provide guidance to the team, contacting the UTP Internal Guidance and Procedures team as necessary.
c. If, in consultation with the DFO, the team determines the issue should be further pursued, the team should consider the issue using standard risk analysis criteria.  The criteria include materiality, nature of the issue, etc.
d. The team should further engage the taxpayer using the QEP to discuss the issue.

5. If the taxpayer disclosed an issue or transaction to the team and the team anticipated the taxpayer would record a reserve for that issue or transaction, but the taxpayer did not file a Schedule UTP:

a. The team should confirm that the taxpayer answered “no” on line 14 of Schedule K, which asks whether the corporation is required to file Schedule UTP, and has signed the tax return under penalties of perjury.
b. If the taxpayer has answered “no” on Line 14 of Schedule K and signed the tax return under penalties of perjury, the team may only ask the taxpayer to confirm that there are no issues to be disclosed according to the Schedule UTP reporting requirements.
c. If the taxpayer has answered “yes” on Line 14 of Schedule K and signed the tax return under penalties of perjury, the team should ask the taxpayer for the Schedule UTP.

6. If the taxpayer filed a Schedule UTP but the team anticipated that additional items would be disclosed on the Schedule UTP in light of the reserves reflected on the taxpayer’s financial statements:

a. The team cannot ask the taxpayer about the make up of the reserves.
b. The team may only ask the taxpayer to confirm that there are no additional issues to be disclosed according to the Schedule UTP reporting requirements. 

7. If the taxpayer’s financial statements reflect an increase in reserves but the filed return did not include a Schedule UTP:

a. The team cannot ask the taxpayer about the make up of the reserves.
b. The team may only ask the taxpayer to confirm that there are no issues to be disclosed according to the Schedule UTP reporting requirements.  The increase in reserves could relate to either (i) state, local or foreign reserves, or (ii) a pre-2010 tax position, neither of which must be reported on the Schedule UTP.

Feedback

CAP teams will be asked to provide feedback about their use of the Schedule UTP. The feedback process is still under development, and additional information will be provided once the feedback process has been finalized.

UTP Project and Issue Tracking Codes

If you receive a filed CAP return with a Schedule UTP, ensure that the Schedule UTP project code, 0579, is on ERCS.  If not, the team manager must update ERCS with the Schedule UTP project code.  For IMS, team managers should ensure ITAC 4579 is entered into IMS for any issue listed on the UTP that is examined.

Questions

Questions or comments related to the proper handling of the Schedule UTP as part of CAP should be directed to the CAP Technical Advisor.