Friday, November 16, 2007

FIN 48: What Kind of Documentation Do You Need and How Do You Protect It

FIN 48, recently issued by the FASB, sets forth standards for recognizing any position taken on an income tax return that impacts the amount of income tax reported on a taxpayer's financials. As firms move to comply with this rule, they will need to know what documentation is necessary and whether the documents will be protected.

The disclosures and calculations necessitated by FIN 48 require the taxpayer to engage in extensive analysis of its tax risk from current and past transactions in preparing its annual and interim financials. This analysis may take memoranda. Although tax opinions are not required by FIN 48, “[FASB] believes that a tax opinion can be external evidence” supporting a taxpayer’s tax-risk analysis. Depending on the materiality and/or complexity of a given tax position, a taxpayer ’s preparation of supporting documentation or its engagement of outside counsel for the preparation of legal opinions or memoranda may assist in meeting the MLTN threshold for recognition or in increasing the measurement of the benefit to be recognized.


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