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Tax Law: FIN 48: Will It Be The Feared Road Map for IRS?

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Ronald Feuerstein
BKK Business Law Newsletter
January 2010

What is FIN 48?

FIN 48 stands for Financial Accounting Standards Board ("FASB") No. 48, Accounting for Uncertainty in Income Taxes.

When is FIN 48 effective? 

While FIN 48 was issued in July 2006 effective for fiscal years beginning after December 15, 2006. At first it was only applicable to public companies. However, non-public companies are subject to FIN 48 for fiscal years beginning after December 15, 2008. Therefore, for instance, all calendar year non-public entities that issue GAAP Financial Statements will be subject to FIN 48 for their 2009 Financial Statements.

What does FIN 48 cover?

FIN 48 applies to all income tax positions and also including decisions not to file an income tax return, allocations among various taxing jurisdictions and characterizations of income. While another FASB, No. 109, exists for income taxes, FIN 48 was designed to provide consistent application of FASB 109.

The broad application of FIN 48 is impressive and may be somewhat surprising to many in that it applies to all types of non-public entities, not just C corporations. Its coverage includes all pass-through entities, such as general or limited partnerships, S corporations, LLCs, tax-exempt entities, sole proprietorships and single member LLCs. The key is GAAP Financial Statements. If your entity issues a GAAP Financial Statement, the company is generally subject to FIN 48.

FIN 48 will require thorough analysis, conclusions and documentation of all income tax positions. In many instances, this will result in entities having to add substantial amounts to tax reserves.

The new FIN 48 concepts involve:

  1. Recognition, 
  2. Measurement, and 
  3. Penalties and Interest.

A first step in analyzing FIN 48 will be to prepare a thorough inventory of all tax positions. Significantly, FIN 48 requires a conclusion that all or part of a tax position is more-likely-than-not sustainable, solely based on technical merits. The risk of detection or audit by tax authorities cannot be considered as a factor.

FIN 48’s initial recognition factor must derive from the weight of relevant tax law authorities, including judicial doctrines, existing as of the reporting date, without any offset for other positions and assuming resolution in the highest court. FIN 48’s reach includes state and local tax positions, including the often thorny issues of nexus, currently a hot button topic for most states’ taxing authorities. The sweeping breadth of FIN 48 also includes foreign/international tax positions, including Internal Revenue Code section 482 transfer pricing.

In applying FIN 48’s measurement component, the recorded tax benefit will equal the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority. This determination must be made based upon management’s experience in similar matters, management’s plans for settlement, appeal or litigation, available documentation and expert advice. Non-filing positions (encountered most often for various states) are subject to an all or nothing test, which if not met, will require recording the entire exposure, unless apportionment is possible and chosen.

Under FIN 48, applicable interest and penalties must be accrued. Treatment of penalties themselves will involve significant judgment and may entail reliance on tax counsel and potential waiver of privileged advice.

While FIN 48 does not require opinions from outside tax counsel, such may be necessary or advisable. Advice from outside tax counsel regarding FIN 48 positions will no doubt raise issues of attorney-client privilege or the federally authorized tax practitioner privilege.

Conclusion and Recommendations

If your non-public entity, including pass-throughs and nonprofits, issues GAAP financial statements, talk with your CPA and tax counsel to discuss FIN 48’s impact. Given the sweeping application of FIN 48, it will likely provide the IRS with valuable information leading to more audits, with taxpayers being on the defensive much more. In the event your entity has uncertain tax positions, you would be well advised to prepare for FIN 48’s new world. Your outside tax counsel can work as a team with your CPA to achieve the best results in order to assess and reduce tax risks.