Accounting for Uncertainty

FIN 48 and new returns standards require tax preparers to assess a variety of thresholds.

October 2007
from Journal of Accountancy

Last year, FASB issued Interpretation no. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. It sets the threshold for recognizing the benefits of tax return positions in financial statements as “more likely than not” to be sustained by the relevant taxing authority. This threshold was significantly higher than tax reporting thresholds for practitioners and taxpayers, likely leading to discrepancies between how uncertain tax positions would be reported for purposes of income tax versus financial statements. In May 2007, the tax law for practitioners changed. This article describes the convergence of uncertainty thresholds for tax positions and identifies potential issues for CPAs and their clients to consider when making tax and financial reporting decisions.

FIN 48 Threshold

FIN 48 augments FASB Statement no. 109, Accounting for Income Taxes, to increase the comparability of financial statements by providing guidance on uncertainty in tax positions. It defines a tax position as one reflected in measuring any current or future reduction in taxable income reported or expected to be reported on a tax return, the decision not to report a transaction in a tax return, or an assertion that the reporting entity is not subject to taxation. In essence, its threshold of greater than 50 percent certainty constitutes a positive assertion by management that the reporting entity is entitled to the economic benefits of the tax position.

FIN 48 prescribes a two-step evaluation for recording uncertain tax positions. First, determine whether the more-likely-than-not threshold is met. Second, measure the benefit of the tax position at the largest amount that is greater than 50 percent likely to be realized upon effective settlement.

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