FIN 48
Beginning with 2009 financial statements, all U.S. companies
must evaluate and disclose their tax risks under Financial Interpretation 48
(FIN 48, now codified as various parts of ASC 740). This provision began applying
to publicly traded companies for 2006 financial statements.
Audited financial statement must conform to Generally
Accepted Accounting Principles (GAAP). The financial statements must provide for worldwide taxes on the income
from continuing or discontinued operations. GAAP requires that this provision take into account the effect of
uncertain tax positions (i.e., tax risks). Flow-through entities such as S corporations, pay little or no U.S.
tax. But U.S. companies, whether C
corporations, S corporations, or LLCs, with operations or subsidiaries outside
the U.S. must pay foreign tax and face foreign tax risks.
FIN 48 Requirements
Each company must:
- Identify
its uncertain tax positions (including risk of tax where no return was
filed)
- Assume
the position will be examined by tax authorities who will have all the
facts
- Determine
whether each such position is more likely than not to be resolved
favorably to the company (MLTN)
- For
those positions not MLTN, accrue tax as if the tax return was examined and
the company lost
- For
MLTN positions:
- Determine
the possible outcomes
- Evaluate
the likelihood of each outcomes
- Determine
the tax exposure for that outcome and
- Add
up the probability weighted amounts of tax
- Document
the process
- Accrue
tax and report the outcomes in their financial statements
What You Must Do
FIN 48 represents a substantial extra burden on companies
whose financial statements are audited, or even just reviewed by CPAs. For a public company, the auditor is
prohibited from doing the FIN 48 work. For private companies, it is unclear whether doing the work is a
violation of AICPA rules; it appears that your auditors can do the work, IF
they have the experience and knowledge to do it right.
Example: Acme company
makes banana peeling machines in the U.S. and sells them internationally. Acme's salesmen visit prospective customers
in eight Latin American countries, but Acme has no offices south of the
border. Acme is an LLC, and pays no
Federal or state income tax. Must Acme
accrue taxes? Possibly yes: it has exposure to Latin America taxes. It must determine whether the eight countries
may tax it, and how likely it is. Under
FIN 48, Acme must assume it gets audited in each country, and apply local
rules. If neither Acme nor its CPA can
do this, Acme must hire someone who can.
For more information, see:
