What Exactly is FIN 48 and How Does It Effect Tax-Exempt Entities?

FIN 48 is an accounting standard that publicly traded companies have been complying with since 2007. Due to many comments and concerns about the standard, the implementation was delayed for nonpublic entities. FIN48 is an interpretation that clarifies accounting for uncertainties in income taxes, but more importantly, it changes the way that resulting liabilities are recognized, measured, presented and disclosed in the financial statements. When a tax return is completed, every answer or number is really a tax position. FIN48 asks the theoretical question, “would that tax position (either taken on a return or expected to be taken on a future return) stand up to examination by the IRS if they have full knowledge of the facts?”. 

Ok that is a bunch of tax talk. How can this standard affect tax-exempt organizations? The Financial Accounting Standards Board actually addressed that issue specifically, in a staff position paper issued last year. There are several FIN48 issues that can affect tax exempt agencies, but the most common are (1) performing services that are not consistent with the organization’s tax exempt purpose and (2) unrelated business income.

The first assessment of any tax position is whether or not the position is more likely than not to be upheld during an IRS examination. If the position would be upheld, then it is NOT an uncertain tax position and there is NO liability.  If the position cannot be upheld, then FIN48 requires a liability to be recorded and disclosed. The calculation of the liability is prescribed but allows some judgement. The recorded liability is the difference between the benefit recorded (full amount) and the amount that would be 50% or more likely to be allowed after the examination. The disclosure will identify this as an uncertain tax position, and will raise red flags for an IRS audit. As reported in the Journal of Accountancy, the IRS is currently proposing companies with more than $10 million of assets to disclose uncertain tax positions on their annual returns. 

Need help in determining what is considered an “uncertain tax position”? See our next post.