Settled or Not Settled Fact Pattern 1 3D Printing Inc. (3D Printing), a calendar-year-end company, has multiple uncertain tax positions (UTPs) related to its 2010 federal tax return. Some UTPs met the more-likely than-not recognition threshold on the basis of 3D Printing’s initial assessment while others did not. During 2012, the IRS audited the 2010 tax return. During Q3 2012, the examining agents verbally indicated the preliminary conclusion on certain UTPs, and the IRS and 3D Printing formalized their agreement on these UTPs by signing IRS Form 906, “Closing Agreement on Final Determination Covering Specific Matters,” in Q4 2012. Subsequently, in Q1 2013, the IRS completed its examination of the 2010 tax return whereby the IRS and 3D Printing agreed to the final closing agreement. 3D Printing does not intend to appeal or litigate any aspects of the examined UTPs, and it is remote that the IRS would examine or reexamine any aspects of the 2010 federal tax return. Refer to the table below for further facts on each of the UTPs. Met Recognition Threshold? Amount of Tax Benefit Recognized in the Financial Statements Specifically Examined? Verbally Communicated in Q3? Listed on Q4 Form 906? Benefit Sustained UTP 1 No 0% Yes Yes Yes 80% UTP 2 No 0% No No No 100% UTP 3 No 0% Yes No Yes 0% UTP 4 Yes 65% Yes Yes Yes 50% UTP 5 Yes 70% No No No 100% UTP 6 Yes 60% Yes No Yes 0% Required: 1. For each tax position taken on its 2010 federal tax return: a. When can 3D Printing assert an “effective settlement”? b. When should 3D Printing adjust previously recognized amounts in the financial statements, if any? 2. Does 3D Printing have a basis to change its assessment of similar tax positions taken in other periods if it concludes it meets the effective settlement conditions related to the UTPs included in its 2010 tax return? 3. If 3D Printing were to report under IFRSs, what are the main differences in accounting for uncertainty in income taxes it would encounter?
1. a. 3D Printing can assert an "effective settlement" for each UTP once the IRS and 3D Printing have signed the final closing agreement, which occurred in Q1 2013 for all UTPs except UTP 2 and UTP 5 which were not examined or settled.
b. 3D Printing should adjust previously recognized amounts in the financial statements for UTP 1, UTP 4, and UTP 6. For UTP 1, 80% of the tax benefit should be recognized in the financial statements. For UTP 4, 50% of the tax benefit should be recognized. For UTP 6, no tax benefit should be recognized.
2. Yes, 3D Printing has a basis to change its assessment of similar tax positions taken in other periods if it concludes it meets the effective settlement conditions related to the UTPs included in its 2010 tax return. The effective settlement condition is met when the IRS and 3D Printing have signed the final closing agreement for a UTP.
3. If 3D Printing were to report under IFRSs, the main differences in accounting for uncertainty in income taxes it would encounter are:
- IFRS requires recognition of a tax benefit only when it is probable that the tax authority will accept the position. This is a higher threshold than the more-likely-than-not recognition threshold required by US GAAP.
- IFRS requires the measurement of uncertain tax positions using a "most likely" approach rather than a "more-likely-than-not" approach.
- IFRS requires the disclosure of significant uncertain tax positions in the financial statements, regardless of whether the recognition threshold has been met or not. US GAAP only requires disclosure of unrecognized tax benefits when the recognition threshold is not met.
1. a. 3D Printing can assert an "effective settlement" for the UTPs when the IRS and 3D Printing have signed a closing agreement (Form 906) and agreed to the final determination on those UTPs. In this case, for UTPs 1, 4, and 6, 3D Printing can assert an effective settlement since they were specifically examined, verbally communicated in Q3, and listed on the Q4 Form 906.
b. 3D Printing should adjust previously recognized amounts in the financial statements when the effective settlement is reached. For UTPs 1, 4, and 6, where the benefit is sustained, 3D Printing should adjust the recognized tax benefit in the financial statements to reflect the agreed-upon amount. However, for UTPs 2, 3, and 5, where the benefit is not sustained, no adjustment is required since there was no tax benefit recognized in the financial statements.
2. Yes, 3D Printing has a basis to change its assessment of similar tax positions taken in other periods if it concludes it meets the effective settlement conditions related to the UTPs included in its 2010 tax return. If the same positions and conditions are met in other periods, 3D Printing can assert an effective settlement and adjust the recognized tax benefits accordingly in those periods as well.
3. If 3D Printing were to report under IFRSs (International Financial Reporting Standards), there are some main differences in accounting for uncertainty in income taxes it would encounter. Under IFRSs, uncertain tax positions are accounted for using the "balance sheet liability method," which means that the tax benefit is recognized only if it is probable that the position will be sustained based on the technical merits. Additionally, the tax benefit recognized is measured at the amount that is "more likely than not" to be realized. Unlike US GAAP, there is no recognition threshold of "more-likely-than-not" for uncertain tax positions. Furthermore, the disclosure requirements for uncertain tax positions under IFRSs are more detailed and specific compared to US GAAP.