Attorneys Seek Greater Transparency From IRS Under Proposal for Reporting Uncertain Tax Positions

We are writing with respect to the significant new reporting requirements proposed in Announcement 2010-9, 2010-7 I.R.B. 408. Those changes would require business taxpayers to disclose uncertain tax positions on a new schedule that would be filed with taxpayers' federal income tax returns.¹

We represent a diverse group of affected taxpayers who share the goals of the Internal Revenue Service (the "IRS") to improve the administration and enforcement of the tax laws. Therefore, we acknowledge and fully support the legal right and duty of the IRS to collect information from taxpayers that is necessary and appropriate to enable it to audit the correctness of taxpayers' returns.² We also commend the IRS for seeking ways to enable it to perform its responsibilities more effectively and efficiently.

Nevertheless, taxpayers have numerous questions and concerns about the reporting requirements proposed in Announcement 2010-9. Our comments are intended to assist the IRS in understanding these questions and concerns and evaluating how the new reporting requirements might be implemented to improve the audit and examination process.

I. General Comments

Announcement 2010-9 fundamentally alters the tax enforcement landscape. It does so in a manner that provides the IRS with a disproportionate advantage in what is fundamentally an adversarial process, without recognizing legitimate taxpayer expectations of reciprocal transparency and procedural fairness. As a result, the system proposed in the announcement should be undertaken (a) only incrementally, because of the profound changes it proposes, (b) only when parallel changes are made to the manner in which the IRS deals with taxpayers, and (c) only after proper safeguards are incorporated recognizing the legitimate interests taxpayers may have in maintaining the confidentiality of information that may be legally protected from disclosure.

Announcement 2010-9 may have the counterproductive effect of rewarding taxpayers with more aggressive risk profiles. Because taxpayers often must make judgment calls when determining how to report a tax position for financial statement purposes, taxpayers presented with similar facts may reach different conclusions regarding the certainty of a tax position. Some taxpayers take a conservative approach to their FIN 48 reporting, erring on the side of acknowledging any appreciable uncertainty, while others express more confidence about their positions. By compelling taxpayers to disclose positions that have been labeled as uncertain for financial statement purposes, Announcement 2010-9 may punish taxpayers who acknowledge greater uncertainty in their financial statements. In this way, the announcement may create an incentive for conservative taxpayers to become more like their aggressive competitors in order to avoid disclosing their uncertain tax positions to the IRS. That, in turn, could diminish accounting transparency.

Therefore, we recommend that the approach described in Announcement 2010-9 be implemented in an incremental fashion, as a test program, so that concerns, both currently identified and not yet apparent, may be addressed before they become major systemic problems. An incremental approach would also give the IRS time to put systems in place to handle the new information efficiently and prudently rather than use the information provided by the reporting requirements to disallow positions without a full analysis.

The approach described in the announcement could be phased in based on one or more of several criteria:³

• Require disclosure of uncertain tax positions raised by transactions required to be disclosed under Treas. Reg. § 1.6011-4.⁴

• Require disclosure of uncertain tax positions identified as part of the LMSB Issue Tiering Program.⁵

• Implement the system first for items on an expanded list of transactions, which could include new categories the IRS deems appropriate, based on particular issues or Code or regulation provisions of concern.

• Conversely, the IRS could adopt an "angel list" delaying implementation with respect to certain transactions or categories.

• The "angel list" could exempt "certain basic business transactions," such as those listed in the legislative history of the recently-codified economic substance doctrine.⁶

• • The "angel list" could include any accounting period and accounting method issues described in annual automatic change revenue procedures⁷ (even if the taxpayer has not submitted a change request thereunder) and any substantially similar items.

  • Implementation could be delayed for transfer pricing issues for which principal documentation is already required to be disclosed under transfer pricing rules.

• Implement the system based on the status of the taxpayer:

• • The IRS could adopt a system similar to that adopted in the United Kingdom, pursuant to which taxpayers are risk-assessed based on audit history, systems and processes, etc., and implement the program first for the highest risk taxpayers.

  • Taxpayers enrolled in the pilot Compliance Assurance Process ("CAP") or Limited Issue Focused Examination ("LIFE") represent a low-risk group and the IRS may consider exempting them from the reporting requirements or exempting items below the existing CAP and LIFE materiality thresholds specified in the Memorandum of Understanding ("MOU") between the taxpayer and the IRS.

• Require disclosure of uncertain tax positions that meet a certain threshold.

• • Eliminate positions for which the reserved amount is below X% (e.g., 20%) of the potential tax benefit.⁸

   

  B. The Requirements of Announcement 2010-9 Should Not be Adopted Without Reciprocal Changes in the Manner in Which the IRS Administers and Enforces the Tax Laws

The OECD's Study into the Role of Tax Intermediaries proposes that taxpayers and tax authorities enter into an "enhanced relationship" in which taxpayers provide increased disclosure and transparency to tax authorities and, in exchange, tax authorities "demonstrat[e] understanding based on commercial awareness, impartiality, proportionality, openness through disclosure and transparency, and responsiveness."¹¹ Both taxpayers and tax authorities benefit from this enhanced relationship -- tax authorities are better informed and able to make effective risk assessments while taxpayers are better able to manage tax risks, achieve increased tax certainty, and reduce compliance costs. The OECD's report on Building Transparent Tax Compliance by Banks, which considers the enhanced relationship in the context of bank taxpayers, similarly recognizes that tax authorities desire an open and cooperative relationship with bank taxpayers to identify potentially abusive tax planning and that, in turn, "banks would benefit from a real-time dialogue with revenue bodies to assist their risk assessment."¹²

Announcement 2010-9 compels taxpayers to increase disclosure and transparency, but, unlike in the OECD-contemplated enhanced relationship, the IRS is not taking on additional responsibilities of its own. If taxpayers are compelled to be more transparent with the IRS by disclosing their uncertain tax positions, the IRS should reciprocate.

For example, the IRS approach to audits often seeks to compel taxpayers to disclose any hazards they perceive in their case. The IRS has long had a policy of seeking advisor opinions, which will frequently contain a discussion and evaluation of the risks and weaknesses in a taxpayer's position. Announcement 2010-9 can be viewed as an extension of this policy, as it provides the IRS with a road map to those issues with respect to which a taxpayer perceives hazards. Yet, the IRS has also long maintained a policy of redacting its published internal legal advice to eliminate discussion of perceived hazards. It is unclear (at best) why the IRS should maintain this policy of secrecy when taxpayers are expected to disclose their hazards and risks.

Moreover, as contemplated by the OECD (and by the United States itself, as a major participant in the OECD efforts), the IRS could increase its responsiveness by devoting increased resources to providing taxpayers with advance certainty on their tax positions. Areas in which the IRS could improve responsiveness include (a) audit cycle time, (b) private letter ruling response time, and (c) response time for informal inquiries.

One way to decrease audit cycle time would be for the IRS to expand and make permanent the pilot CAP program, the objective of which "is to reduce taxpayer burden and uncertainty while assuring the Service of the accuracy of tax returns prior to filing, thereby reducing or eliminating the need for post-filing examinations."¹³ Programs such as the CAP program may face increased demand if the proposed reporting requirements are adopted. Similarly, applications to participate in the LMSB / Appeals Fast Track Settlement program may also increase in order to resolve disputes triggered by the new disclosures. The IRS should dedicate the necessary resources to handle the increased demand.

Similarly, the IRS should improve and expand the Pre-Filing Agreement Program, which "encourages taxpayers to request consideration of an issue before the tax return is filed and thus, resolve potential disputes and controversy earlier in the examination process,"¹⁴ by devoting additional IRS resources to reduce the total time to complete a pre-filing agreement and increase the number of selected participants.¹⁵ The IRS could also expand the Pre-Filing Agreement Program to resolve unsettled legal issues. Similar measures could be taken with respect to advance pricing agreements, private letter rulings, and other forms of advance guidance, as well as with the Industry Issue Resolution program. Moreover, the IRS could devote increased resources to providing more guidance on uncertain areas of the law for all taxpayers through additional regulations, revenue procedure, revenue rulings, etc.

To alleviate these concerns, the IRS should consider limiting the information it requires taxpayers to disclose regarding their uncertain tax positions. For example, disclosure of information that relates only to the identification of the uncertain issue and its claimed tax treatment should be sufficient to apprise the IRS of the taxpayer's uncertain tax positions, and is similar to the information currently required by the IRS in the reportable transaction context.¹⁹ The IRS does not need to require the additional disclosure of the taxpayer's rationale for its positions and the reasons for determining that a position is uncertain. Once a taxpayer's uncertain tax positions have been identified, the IRS can make its own assessment of the position's merits.

If the IRS does require taxpayers to disclose the rationale for a position and the reasons why such position is uncertain, the system should include a procedure pursuant to which taxpayers can assert their rights to keep this information confidential, such as by establishing the applicability of the work product doctrine, without being in peril of penalties.²⁰ The IRS's right to information does not override established protections. A legitimate dispute may exist as to whether the IRS can compel the disclosure of such information as required by the announcement.²¹

The courts are currently grappling with the scope of protective doctrines in tax audits, and the law may differ jurisdiction-by-jurisdiction.²² As a result, if the announcement is implemented, certain taxpayers might successfully contest various elements of the new disclosure requirements on privilege grounds, while other taxpayers would not be successful because they are resident in a jurisdiction that interprets the scope of protective doctrines more narrowly. Whether or not a taxpayer will be required to disclose information under the announcement obviously should not depend upon the jurisdiction in which the taxpayer is resident.

Although it is possible that other procedures could be envisioned, the most effective and efficient procedure may be to allow the IRS to reach information required to be disclosed under the new requirements for which a privilege is claimed only through a summons. The IRS summons process is well-defined, ensuring that a taxpayer's rights are preserved.²³ Seeking this information through a summons for each taxpayer claiming privilege would certainly require more resources on the part of the IRS, potentially running counter to at least one goal of the announcement. In the absence of an alternative that preserves the ability of taxpayers to adjudicate claims of privilege, however, the summons procedure may be the best alternative.

As a corollary, the IRS should waive noncompliance penalties when taxpayers assert good faith claims of privilege, even if the taxpayer ultimately must disclose all of the information requested with respect to its uncertain tax positions.²⁴ A good faith requirement would continue to penalize frivolous claims of privilege while preserving legitimate challenges to the new reporting requirements.

In any event, the IRS should clarify that the disclosure of information under the regime contemplated by the announcement will not result in a waiver of applicable protections. At a minimum, the IRS should confirm that it will not assert that, by providing the information described in the announcement, a taxpayer has waived privilege for any related communications or materials.²⁵

II. Additional Comments

We recommend that this requirement be eliminated. Although the requirement appears intended to allow the IRS to determine the relative significance of the taxpayer's uncertain tax positions, a maximum liability figure is often meaningless. The amount of a theoretically possible maximum liability will not reflect the certainty of the tax position. Therefore, it may be a poor indication of a taxpayer's reasonably likely tax liability. Further, agents may be more likely to challenge a tax position simply because there is a large potential federal tax liability.

Requiring taxpayers to determine the maximum amount of potential federal tax liability will place additional and unnecessary burdens on taxpayers. It may be impossible to calculate a "maximum tax adjustment" for a tax position. For example, if a taxpayer's transfer pricing is challenged, there may be many ways to compute the maximum adjustment. In addition, the calculation of the maximum liability can become incredibly complex, such as under section 199 or Treas. Reg. § 1.861-8 et seq., especially if the U.S. tax liability interacts with foreign liability through foreign tax credits, etc.

The IRS could consider alternatives to requiring taxpayers to provide a maximum liability amount, including requiring taxpayers to:

Finally, the current proposal does not address how or whether other items on the taxpayer's return factor into this calculation. Nor does the proposal address how the potential availability of relief from double taxation under treaties should affect the taxpayer's reporting obligation. In most cases, factoring in those other items will result in a reduction of U.S. tax, but in other cases, they could result in an increase. If the rules do not sensibly solve this problem, many of the disclosures required by the proposed rules would in fact provide no meaningful information about real taxpayer exposures. A true picture of the amounts at stake would only be revealed if taxpayers were able to reduce the maximum amount of a potential tax liability by available offsets (e.g., net operating losses). Simply requiring the identification, rather than computation, of uncertain positions would solve this problem.

Taxpayers should not be required to report uncertain tax positions that are on current year financial statements but relate to years prior to the effective date of the announcement.²⁶ Moreover, to avoid duplicative reporting,²⁷ taxpayers should not be required to report positions that are on their financial statements for the reporting year, but relate to positions on tax returns for prior years.²⁸

The related entity rules raise several issues as applied to U.S. subsidiaries of foreign parents. These subsidiaries may not be subject to FIN 48, and the IFRS standards under which their parents reserve for issues on their tax returns may be quite different from the FIN 48 standards. We understand that the term "uncertain tax position" is not even defined under IFRS. As a result, the announcement leaves a good deal of uncertainty about what positions should be disclosed with the U.S. subsidiary's tax return.

One approach to resolving this uncertainty would be to exempt U.S. subsidiaries of foreign parents from the rules if neither the parent nor the subsidiary is subject to FIN 48. At a minimum, the rules should confirm that, if the item is not actually reserved on the parent's financial statements, then there is no obligation to disclose, even if the item might be required to be reserved under the standards of FIN 48 if the subsidiary were subject to FIN 48.²⁹

Beyond these cases, it is unclear what purpose is served by the related entity rules. If the related entity is consolidated with the reporting entity, the rule would appear to be superfluous. If the related entity itself is otherwise required to report uncertain tax positions, the reporting would be duplicative. Thus, the rule should, at most, cover only those related entities that are not themselves required to report and that are not consolidated for financial statement purposes with the reporting entity.

Further, the related entity positions that must be reported should be limited to tax positions that advance IRS enforcement efforts. Announcement 2010-9 suggests that only related entity positions that affect the reporting party's U.S. federal income tax liability should be reported, and this point should be confirmed by the IRS. For example, uncertainty regarding liability for foreign taxes paid should not need to be reported when a foreign tax credit is not yet an issue because no dividend is being paid and the income at issue is not subpart F income.

Finally, application of these requirements in the context of the Code's related party rules may be subject to serious procedural deficiencies -- for example, the proposed rules may purport to impose reporting obligations that cannot be met, or at least cannot be met with any reasonable expenditure of effort, when those obligations require obtaining information from the related party. In other words, parties may be related under a particular definition, but may not necessarily be able to obtain information from the other. As a result, the IRS should adopt a definition of relatedness that takes into account the ability of a taxpayer to obtain any required information.

It is unclear why the existing penalty structure would not be adequate for noncompliance with the requirements of the announcement. The new reporting requirement should be viewed no differently than other disclosures forming part of the taxpayer's tax return. Moreover, it would further the important reciprocity policy described above if the IRS waived applicable penalties, including accuracy-related penalties, for positions disclosed as part of the new reporting requirements. We urge the IRS to consider such an approach.

In any event, as discussed above, we believe that penalties should not be imposed when taxpayers make good faith claims of privilege. We also note that uncertainty can change between the time the financial statements are finalized and the time the return is filed. The regime should confirm that no penalties will apply as long as uncertainty is determined at the time the financial statements are filed (and should more broadly confirm that the reporting should be done as of the time the financial statements are filed, even if it can be shown later that uncertainty materialized or changed as of the time the return was filed).

The increased burden to taxpayers should be assessed in parallel with the government's own cost-benefit analysis. Because Announcement 2010-9 would require reporting of uncertain tax positions without regard to the degree of risk that a taxpayer or a particular transaction poses to tax compliance, the proposed reporting requirements will require the IRS to process an extensive amount of information, only a small portion of which may raise significant tax compliance concerns. We urge the IRS to ensure that it has the necessary systems and procedures to process the disclosed information effectively and efficiently before the announcement is implemented.

More specifically, the requirement to report uncertain tax positions even if the taxpayer takes no reserve for the position for financial accounting purposes because of an expectation of favorable litigation of the tax position, could, if taken to its logical extreme, require every taxpayer to report every position on its tax return. In other words, the requirement could be read to include not only those cases in which the taxpayer anticipates an IRS challenge and a litigation victory, but also those positions with respect to which the taxpayer has a high degree of confidence it would win if the IRS were to litigate, irrespective of the likelihood of such litigation. At a minimum, the IRS should confirm that the latter cases are not within the ambit of the rule.

In addition, and related to the point made above regarding the related entity rules, the requirement to report when no reserve has been taken raises special issues as applied to U.S. subsidiaries of foreign parents. As stated above, these subsidiaries may not be subject to FIN 48, the IFRS standards under which their parents reserve for issues on their tax returns may be quite different from the FIN 48 standards, and the term "uncertain tax position" appears not to be defined under IFRS. As a result, there may be situations in which IFRS does not require a reserve to be posted but FIN 48 would, or situations in which IFRS does not require a reserve but FIN 48 would (but for an expectation of favorable litigation or because the IRS administrative practice is not to examine the position).

As suggested above, the issue could be addressed by exempting from the disclosure regime U.S. subsidiaries of foreign parents if neither the parent nor the subsidiary is subject to FIN 48. At a minimum, also consistent with the suggestion above, the rules should confirm that, if the position is not actually reserved on the parent's financial statements, then there is no obligation to disclose, even if the position might require a reserve (but for an expectation of favorable litigation or because the IRS administrative practice is not to examine the position) under the standards of FIN 48 if the subsidiary were subject to FIN 48.

In addition, taxpayers have no formal role in the exchange of information process. As a result, taxpayers can be put at a disadvantage vis-a-vis foreign tax authorities, to the detriment of the U.S. fisc, without the ability to challenge the exchange of information. This issue is exacerbated if, as discussed above, there is no procedure in place to litigate the privilege question before the information is provided by the taxpayer to the IRS.

III. Conclusion

Announcement 2010-9 is a strong weapon in the hands of the IRS. It leverages disclosures made for purposes unrelated to tax enforcement in a way that disadvantages taxpayers in what is, undeniably, if regrettably, an adversarial process. We recognize the IRS's interest in identifying areas of concern on a taxpayer's returns. Because the reporting requirements in Announcement 2010-9 represent a fundamental change to the tax enforcement system, however, we recommend that the system proposed be undertaken incrementally, only when parallel changes are made to the manner in which the IRS deals with taxpayers, and only after proper safeguards are incorporated to recognize the legitimate interests taxpayers may have in maintaining the confidentiality of information that may be legally protected from disclosure. We recommend that disclosure be limited to identifying the uncertain tax position without an explanation of why the position is uncertain. We further recommend that taxpayers not be required to compute and report the maximum amount of potential federal tax liability, that the IRS clarify that positions relating to past tax years will not be required to be reported, that the IRS address the "related party" and "penalty" comments set forth above, that the IRS ameliorate the burdens imposed by the notice as described above, that the IRS strengthen the policy of restraint as described above, and that the IRS ensure that it has the necessary systems and procedures to process the disclosed information effectively and efficiently before the announcement is implemented.

Thank you for your consideration. We look forward to working with you to address the important concerns raised herein.

²See sections 6001, 7602(a)(1). All section references are to the Internal Revenue Code of 1986, as amended (the "Code"), and all references to "Treas. Reg. §" are to the Treasury Regulations issued thereunder, unless otherwise provided or clear from context.

³ Several of these suggested approaches are discussed in further detail later in this letter.

⁴ Currently, there are five categories of reportable transactions that cover a broad range of transactions: (i) listed transactions; (ii) transactions offered under conditions of confidentiality; (iii) transactions with contractual protection; (iv) transactions resulting in certain losses in excess of specified amounts; and (v) transactions of interest. If an incremental program (or a permanent program) requires disclosure of uncertain tax positions raised by these categories of reportable transactions, those reporting requirements should be coordinated with the current reportable transaction reporting requirements.

⁵ The IRS could choose to cover only Tier I issues, which the IRS views as representing the highest level of compliance risk, or extend the program to cover Tier II and/or Tier III issues. Although requiring disclosure of uncertain tiered issues is one of our suggested incremental approaches, we do not necessarily endorse the IRS's choice of tiered issues or their ranking of those issues.

⁶See Staff of the Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of the Reconciliation Act of 2010, as amended, in combination with the Patient Protection and Affordable Care Act, at 152 (J. Comm. Print 2010). Although an angel list of transactions would provide useful guidance to taxpayers, such a list is less helpful than the IRS's identification of suspect transactions taxpayers should avoid.

⁷See Rev. Proc. 2006-45, 2006-2 C.B. 851 (modified and clarified by Rev. Proc. 2007-64, 2007-2 C.B. 818) (accounting period); Rev. Proc. 2008-52, 2008-2 C.B. 587 (amplified, clarified, and modified by Rev. Proc. 2009-39, 2009-38 I.R.B. 371) (accounting method).

⁸ We considered other potential thresholds (such as requiring disclosure of uncertain items based percentage of assets, income, etc.), the least problematic of which is to eliminate all reporting if total reserves are less than X% (e.g., 1% or .1%) of revenue. The IRS may wish to consider this approach.

⁹ ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, STUDY INTO THE ROLE OF TAX INTERMEDIARIES (2008). Although the OECD Forum on Tax Administration's 2006 Seoul Declaration, which formed the basis for the 2008 OECD study, focused on the relationship between tax intermediaries and tax administration, the 2008 study expanded the scope of the Seoul Declaration to include the role of taxpayers because, in a "tripartite" environment consisting of tax intermediaries, tax authorities, and taxpayers, "the primary relationship -- from both a statutory perspective and a practical one -- is that between the taxpayer and the revenue body." Id. at 11.

¹⁰ ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, BUILDING TRANSPARENT TAX COMPLIANCE BY BANKS (2009).

¹¹ ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, STUDY INTO THE ROLE OF TAX INTERMEDIARIES, at 33.

¹² ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, BUILDING TRANSPARENT TAX COMPLIANCE BY BANKS, at 39.

¹³ Announcement 2005-87, 2005-2 C.B. 1144.

¹⁴ IRS, "Pre-Filing Agreement Program," available at http://www.irs.gov/businesses/article/0,,id=102667,00.html.

¹⁵ In addition, the $50,000 user fee may be a disincentive to taxpayers who wish to participate in the program and the IRS should consider reducing or eliminating it.

¹⁶ Within the self-reporting system, in which taxpayers file tax returns and the IRS examines these returns and proposes adjustments, if necessary, taxpayers are required to defend their tax positions and provide the IRS with an explanation of these tax positions when the IRS challenges those positions. Thus, even early in the examination, the process has at least some of the attributes of an adversarial proceeding.

¹⁷ In fact, the IRS itself has recognized the importance of these protective doctrines -- from July 1, 2008 through December 31, 2009, the IRS withheld 7,925 (79%) of its e-mailed Chief Counsel Advice as privileged (i.e., subject to the work product doctrine and/or the attorney-client privilege). See OFFICE OF CHIEF COUNSEL, INTERNAL REVENUE SERVICE, REPORT REGARDING EMAILED CHIEF COUNSEL ADVICE (Mar. 31, 2010), available at http://apps3.irs.gov/pub/irs-utl/200807-200912_cca_report.pdf.

¹⁸See Jeremiah Coder, "Wilkins Discusses Need for Uncertain Tax Position Reporting," TAX NOTES (Mar. 3, 2010) (citing statements by IRS Chief Counsel William Wilkins to the effect that "[c]ontroversy over what the IRS means in requiring a concise description of each uncertain tax position is overblown").

¹⁹ The Reportable Transaction Disclosure Statement (Form 8886) generally requires taxpayers to identify the type of reportable transaction and the tax benefit resulting from the transaction, as well as to provide a description of the amount and nature of the expected tax treatment and expected tax benefits generated by the transaction for all affected years.

²⁰ The reaffirmation of the policy of restraint would not adequately protect taxpayers. Even though the most sensitive information (i.e., the taxpayer's assessment of the likelihood of prevailing) is not requested in Announcement 2010-9, the information requested would provide the IRS with important information from the taxpayer's tax accrual workpapers, and would generally raise the same privilege issues. (Indeed, given the uncertain boundary between the materials requested by the announcement and the materials covered by the policy of restraint, the announcement may be viewed as inconsistent with the IRS policy of restraint.)

²¹See, e.g., Upjohn Co. v. United States, 449 U.S. 383 (1981).

²²See United States v. Textron, 577 F.3d 21 (1st Cir. 2009), vacating and remanding 507 F. Supp. 2d 138 (D. R.I. 2007), petition for cert. filed, 78 U.S.L.W. 3375 (U.S. Dec. 24, 2009) (No. 09-750); United States v. Roxworthy, 457 F. 3d 590 (6th Cir. 2006), rev'g and remanding No. 04-MC-18-C (W.D. Ky. Apr. 4, 2005), nonacq. 2007-40 I.R.B. 720 (Oct. 1, 2007); United States v. Deloitte & Touche USA LLP, 623 F. Supp. 2d 39 (D. D.C. 2009); Regions Financial Corp. v. United States, 2008-1 U.S.T.C. ¶ 50,345 (N.D. Ala. 2008).

²³See sections 7402(b), 7602, 7603, and 7604; United States v. Powell, 379 U.S. 48 (1964); Reisman v. Caplin, 375 U.S. 440 (1964); Internal Revenue Manual § 25.5. The alternative, to allow a proceeding on privilege prior to the audit stage, is less practical and may also raise legal issues regarding whether any subsequent audit constitutes an impermissible second inspection. See section 7605(b).

²⁴A fortiori, the penalty would not be imposed if the taxpayer privilege claim was successful.

²⁵ Even this confirmation, however, would not adequately protect taxpayers from waiver claims made by governmental entities other than the IRS (e.g., state tax authorities) and private litigants, or from a sua sponte finding of waiver by a court. The IRS should thus consider recommending or supporting legislation on this point.

²⁶ For example, neither reserves that are first accrued prior to the effective date of the announcement nor reserves that relate to transactions prior to the effective date of the announcement should be required to be disclosed.

²⁷ The only situation in which such reporting would not result in duplicative or pre-effective date reporting would be where the taxpayer changed its evaluation in the current year of a position taken on a prior year return. It would seem reasonable for the IRS to include reporting of such amounts, as long as they reflected inclusion of a position that was not previously included (as opposed to a change in the reserve) and were not with respect to pre-effective date years.

²⁸ For this purpose, carryforward items would be treated as tax positions that relate to prior year tax returns. For carryback items, a disclosure in the year in which the item arose would be sufficient. Moreover, additions to reserves purely to reflect the accrual of interest should not be viewed as new uncertain positions that would need to be disclosed.

²⁹ Apart from the definitional uncertainty, there is the practical issue that the U.S. tax director may not be a central participant in the decision regarding whether or not to reserve, and how much to reserve, on the parent's financial statements under IFRS for a U.S. tax issue. If the regime as applied to such subsidiaries is not modified, such a subsidiary's tax director will have to seek to broaden her role in the foreign reserve process.

³⁰See Jeremiah Coder, supra note 18 (citing statements by IRS Chief Counsel, William Wilkins).