FIN 48

By Mike Sorrells and Laura Kalick

In addition to the new IRS reporting and disclosure requirements, in the interest of transparency, Financial Accounting Standards Board Interpretation (FIN) 48 now requires audit recognition of all material uncertain tax positions for organizations that prepare GAAP financial statements. Nonprofit FIN 48 disclosures include unrelated business income tax issues and exemption issues for both the state(s) and the Federal government. In addition, any tax that is based upon an income determination, such as the 2% tax on investment income that is paid by private foundations, is also an issue. FIN 48 disclosures made on financial statements are to be disclosed on the redesigned Form 990 as well.

As noted in the first article in this issue on the proposal Form 990, it is likely that in addition to the financial statement disclosures required, these same disclosures will have to be repeated on the Form 990

While most exempt organizations are likely to feel that they don’t have any uncertain tax positions, their auditors will still have to be assured that there is a “more likely than not” probability that each tax position will be sustainable upon examination.

In addition to answering the most basic question of whether the organization is still qualified as a tax-exempt entity, all revenue streams and activity should be analyzed to determine if they are truly exempt from tax. If there is Unrelated Business Income (UBI) for an organization, the calculations and allocations will have to be examined for reasonableness. Additionally—and this may be problematic for many nonprofits—when there is UBI present, an analysis of state nexus should be performed to determine if there is an unrecorded state tax liability in other than the home state.

If there are uncertain material tax positions, the amount of tax that would relate to these positions must be recognized on the financial statements. This does not only relate to the current year but any years for which a liability could be assessed on this position. This liability would also have to take into effect any penalties or interest that would have accrued on the unpaid tax.

FIN 48 is effective for tax years beginning in 2007, so December 2007 year-end organizations will be the first to be subjected to these audit procedures. It is certainly not too early for organizations to begin analyzing their tax positions and consulting with their auditors to determine how best to handle this new requirement. In some cases, organizations may want to consider bringing in third-party experts to assist with the project.

Mike Sorrells is the director of the Nonprofit Tax practice in BDO Seidman’s Greater Washington, D.C. office. He can be reached at rsorrells@bdo.com. Laura Kalick is a senior manager in the Nonprofit Tax practice in BDO Seidman’s Greater Washington, D.C. office. She can be reached at lkalick@bdo.com.

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