FASB Interpretation No. 48 (FIN 48) Compliance | Uncertain Tax Positions

The Financial Accounting Standards Board (FASB) recently issued an interpretation that may leave executives at midsized companies scrambling to comply. FASB Interpretation No. 48 (FIN 48) requires companies to rigorously assess the merits of their uncertain tax positions taken on any tax return for any "open" tax year. Generally, tax returns are considered open to audit by taxing authorities for three years following the date they were filed.

What is an uncertain tax position?

All companies seek to legitimately reduce their overall tax bu rden and minimize or delay cash outflows for taxes. Positions taken in tax returns may be well-grounded and in good faith, but with the complexities and varying interpretations of the tax law, these positions may not ultimately prevail. Complexity creates uncertainty regarding the actual be nefit a company will receive from a position taken on its tax return. FIN 48 establishes uniform accounting for uncertain tax positions.
Common examples of uncertain tax positions include characterizing gains or losses as capital gains or losses, claiming a tax credit, allocating income between jurisdictions (or not filing a return when a company believes it does not have nexus in a state or country), excluding income the company believes is tax-exempt, and taking a tax deduction.

Compliance deadline is fast approaching

For midsized companies without a large in-house tax department or the ability to dedicate multiple staff members to a special project, complying with this interpretation could prove daunting, especially for those that file in multiple states and countries.

FIN 48's aggressive timeline magnifies the problem. In January, the FASB unanimously rejected a petition by 400 corporate executives to delay FIN 48 implementation. For calendar-year-end companies, FIN 48 is effective for 2007. Calendar-year companies that only issue year-end annual financial statements may not have to reflect the results of FIN 48 until they issue their financial statements at the end of 2007.

Companies that issue their GAAP-based (Generally Accepted Accounting Principles) financial statements more frequently, such as monthly or quarterly as required by their bank or Securities and Exchange Commission (SEC) rules, must comply with FIN 48 for interim statements as well. For these companies, the compliance deadline is fast approaching (or may already be here).

FIN 48 deadline postponed for private companies

On Nov. 7, 2007, the Financial Accounting Standards Board (FASB) voted to delay the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), for private companies.

Those that haven’t already implemented the new rules can now postpone compliance until periods beginning after Dec. 15, 2007. For most private companies, this reprieve means that FIN 48 will affect only their calendar-year 2008 and later financial statements.

FIN 48 requires companies that prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) to review all of their federal and state tax positions — including decisions not to file in a particular state — and to determine whether the positions would “more likely than not” withstand a challenge by the IRS or a state tax authority.

If a position fails the more-likely-than-not test, the corresponding tax benefit isn’t recognized in the company’s financial statements. For positions that meet the test, FIN 48 outlines a complex process for determining the portion of the benefit that should be recognized. In either case, the company must establish reserves for the portion of the tax benefit that isn’t recognized and make financial statement disclosures about uncertain tax positions.

When making its decision, FASB took into account widespread concern that there was a general lack of awareness of the new requirements. In particular, many pass-through entities — such as partnerships, S corporations and limited liability companies (LLCs) — were unaware that FIN 48 even applied to them. FASB didn’t feel it was necessary to develop separate guidance on the application of FIN 48 to pass-through entities but did say it would take steps to inform these companies that the new rules do indeed apply to them.

FASB is expected to issue the deadline deferral in the form of a proposed amendment to FIN 48, such as a FASB Staff Position, which would have a 30-day comment period once it’s released. However, it appears unlikely that the comment period would result in significant changes to the deadline deferral.

Although FASB’s decision is good news for private companies, it doesn’t mean they can put off thinking about FIN 48 for a year. These companies should start examining their situations soon to evaluate the potential impact of FIN 48 on their financial statements and to ensure that procedures are in place to gather the information FIN 48 will require.

If you have any questions about how FIN 48 affects your company and the preparation of its financial statements, please let us know. We would be glad to review your situation and help you prepare any information required to comply with this new accounting rule. 

The FIN 48 approach

FIN 48 utilizes a two-step approach for evaluating tax positions. It addresses the recognition and measurement of income tax positions using a "more likely than not" (MLTN) threshold.

• Step one: recognition. Under FIN 48, the FASB may not recognize a benefit related to an uncertain tax position in the financial statements unless it is MLTN (more than 50 percent probable) the position will be sustained based on its technical merits.
  
  
• Step two: measurement. FIN 48 also requires a greater than 50 percent likelihood the position would be sustained if challenged by the taxing authorities and appealed to the highest court in the relevant jurisdiction.

Consider the example of "Company A." Company A takes a $100 research-and-development credit on its federal income tax return. Based on past history of similar tax credits, the company's tax officials believe there's just a 40 percent likelihood that, if the company was audited, the IRS would allow the entire credit. However, they believe there is at least a 51 percent likelihood the IRS would allow $80 of that credit. The IRS would allow the company to recognize the $80 tax benefit in its financial statements. The remaining $20 would appear as a liability in the company's financial statements.

Prior to FIN 48, Company A officials might have arrived at their $80 prediction (or some other amount) using various thresholds of probability they deemed appropriate. Likewise, they might have reported the $20 liability in various ways within the company's financial statements. FIN 48 establishes a uniform approach.

FIN 48 does not require companies to restate liabilities in previously issued financial statements. Instead, the cumulative effect of the change may be presented as an adjustment to the company's beginning retained earnings in the year of adoption.

Choose Freed Maxick & Battaglia, CPAs to assist with FIN 48 Compliance

While some midsized companies will have the time and resources to comply with FIN 48, others will need to seek outside assistance. Publicly traded companies, in particular, may need outside help because of SEC independence rules limiting the assistance the company's independent auditors can provide. Choose Freed Maxick & Battaglia, CPAs to help your organization meet its FIN 48 requirements. Freed Maxick is well-versed in GAAP as well as in the tax laws. Freed Maxick can facilitate communication between your auditors, tax professionals and other external parties.

FIN 48 is applicable to all entities whether they are privately owned, publicly traded or not-for-profit organizations. Can your organization comply with this far-reaching interpretation?

Mark Stebbins, CPA	Tom Chiavetta, CPA	Jeff Zawada, CPA
Tax Director	Tax Director	Tax Manager
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