What is it and how does it affect me?

FIN 48 – WHAT IS IT AND HOW DOES IT AFFECT ME?
Steve Kilpatrick

FIN 48 is FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”. Sounds ominous, doesn’t it? Well, any of you who undergo a financial statement audit or produce GAAP financial statements needs to become familiar with FIN 48, or at least ask your auditor about it. The effective date for most privately held companies is for fiscal years beginning after December 15, 2007. Not only does it apply to large publicly traded companies, but it also applies to privately held companies, not-for-profit organizations, and pass-through entities (such as partnerships and S corporations).

How does it affect my financial statements?

What the FASB (Financial Accounting Standards Board) is really doing here is requiring a company, who has taken an aggressive or uncertain tax position in a tax return, to record a liability in the financial statements for the additional tax that may be assessed based on the probability that the tax position would not hold up under an examination by the IRS or some other taxing authority. Some say that the required disclosures in the financial statements will give the IRS a roadmap to the areas in the company’s tax return that they could challenge.

In a nutshell, FIN 48 requires a company to identify and evaluate individual income tax positions taken in previously filed income tax returns or a position expected to be taken in a future tax return to determine if the benefits of those tax positions can be recognized in the financial statements.

What is a “tax position”?

The term “tax position” includes, but is not limited to the following:

A decision not to file a tax return in a jurisdiction (a particular state for instance)
An allocation or a shift of income between jurisdictions
The characterization of income in the tax return
A decision to exclude taxable income in the tax return
A decision to classify a transaction, entity, or other position in a tax return as tax exempt

Let’s look at two examples of a tax position that may be familiar to you. The first would be a decision not to file income tax returns in states where a company potentially has taxable activities. Say you have employees working on a job in another state for an extended period of time, or you have someone traveling around a state making sales calls, or you maintain a small office or warehouse facility in another state. Each state is different, but any of these scenarios might establish nexus and require tax returns to be filed. If you have been rolling the dice and haven’t filed returns because the taxing authorities don’t know you are there, that is an uncertain tax position that needs to be evaluated. The second example would be the treatment of personal expenses of the owner that are paid by the company. If there is not a clear business purpose for such expenses and they are not reported as taxable income to the owner, this is a tax position that would not stand up in an IRS examination. In each of these examples, FIN 48 would require an evaluation of the tax position assuming that it would be examined by the IRS or the state taxing authority. If such an examination would result in additional tax due, then a liability must be recorded in the financial statements.

What should I do now?

The actual application and requirements of FIN 48 are much more complex than discussed here, and it would only apply to amounts that would be considered material to the financial statements. I strongly suggest that you contact your CPA as soon as possible to discuss the potential impact on your company. Even though the effective date for implementation of FIN 48 is just around the corner, the FASB has recently made a few changes to this. At its October 1, 2008 board meeting, the FASB agreed to a one-year deferral of FIN 48 for all pass-through entities (such as partnerships and S corporations). The board also agreed to exempt private companies from certain disclosure requirements in FIN 48.

Steve Kilpatrick is a CPA and the audit partner at Pickens Snodgrass Koch LLP (PSK). Steve has over 30 years of public accounting experience and works with various types of construction and manufacturing companies. PSK is an accounting firm that provides a variety of audit and tax services to companies located throughout Texas. 1-800-424-5790 www.pskcpa.com