In certain circumstances, the principles require recognition of all tax balances on financial statements that are unrecorded on corporate tax based returns, more so those with "uncertain" tax positions. Examples of tax positions are determined on whether a meal expense is 50 or 100 percent deductible, determining whether a tax return should be filed in another country among others.
The management of Grant Thornton has revealed the following income tax positions (ITP); Fin 48 applying to income taxes, property, franchise taxes among other exempt. Each ITP is evaluated by assuming full examination of the appropriate taxing authorities. Furthermore, it has been assumed that the various taxing authorities possess high and complete knowledge of the various facts and circumstances similar to each ITP. Management has evaluated these ITP for the tax years that ended December 31, 2006, 2007, 2008 and 2009. Fin 48 is not present in international accounting standards. It is an expansion of the already existing rulebook on various accounting for taxes, but with various exceptions. Fin 48 assumes that potential tax auditors know everything in all businesses and their tax assistants have adequate knowledge about each tax position. Interestingly, outside tax preparation handlers have few stringent and compliance based standard than the more similar Fin 48 based threshold. Fin 48 further assumed the all hypothetical auditors will try to pursue the investigation of uncertain tax based positions without restriction of money, time or other resources, and also ignores any chance hence high favorable results could be created in most of the real-life tax based audit situations.
Read why you should pay to write a memo for you!
What guidance does SFAS 109 provide?
SFAS 109 involves Accounting for Income Taxes. Federal, State and Foreign income-based tax laws are very complex and ambiguous, and as a result, the application of those rules tends to be unclear. Most companies, though in good faith, try to take positions on income tax returns that may be somehow disputed by Federal, State and Foreign based taxing authorities. The tax positions may be denied when challenged because it lacks a clear guidance under SFAS 109 which calls for diversified based accounting practices developed to deal with the aforementioned uncertain tax positions. The successful completion of the SFAS 109 and also the FIN 48 analysis requires must be coordinated by both GAAP and tax expertise.
Evaluation of Tax Position and Two Step Processes
Due to a lack of clear tax guidance within SFAS 109, diverse accounting positions had developed to deal with uncertain based tax. To create uniformity within a reporting area, the FASB issued and promoted FIN 48. Two processes are involved. They include any tax position creating a tax based benefit, which when reported on a company's financial statements must satisfy the various requirement such as "more likely than not" (MLTN). This means that the position will finally be sustained based on its merits not unless challenged by the IRS. In considering the various likelihood of success, the taxpayers assume the controversy will be taken up and include the various court of last resort. The MLTN policies assume that the IRS has adequate knowledge of all tax positions and relevant facts. It means that the company cannot consider the likelihood of all audits achieving an MLTN conclusion.
Secondly, FIN 48 processes apply to all the tax positions taken in open tax years and not the current year. This generally means that it applies to all tax positions taken up to more than 3 years. If a company has a net operating loss (NOL) carried forward, the time taken can be even longer.
Effects of Subsequent Events
The subsequent events require full disclosure of tax benefits that do not meet the MLTN test and which fail to qualify for the financial statement recognition. Annual filings are required to disclose these positions and any changes although these reporting requirements are not onerous as in public companies.
Discuss tax accrual work papers and effective tax rate reconciliation work papers and IRS's treatment/view of each
Even though Grant Thornton is a tax-exempt entity, the company is required to report and pay all income tax from revenues considered to be not related to business income. Grant Thornton management has also analyzed the facts and various circumstances surrounding all these revenue streams.
In order to minimize the amount of income taxes incurred by the unrelated business, Grant Thornton claimed expense deductions on its various income tax returns. Grant Thornton management has reviewed all the direct and some allocated expenses especially those deducted from its taxable based gross revenue streams.
Net Operating Losses "Carried Forward"
The Management has reviewed the circumstances leading to the generation of new operating losses and believes the losses meet all the requirements under the tax code considered to be "valid" operating losses. Therefore, no accrual for uncertain tax position related to the current year.
Conclusion / Recommendation
It is recommendable for all companies to take the following measures when dealing with uncertain tax positions. First, to determine whether each tax position meets the necessary standard stipulated under the taxation policies. If the position satisfies these standards, the Grant Thornton and other companies must determine the benefit that should be fully recognized on all financial statements.