Effective for fiscal years beginning after December 15, 2008, FASB Interpretation No. 48, generally referred to as "Accounting Guidance FIN 48," applies to all tax-exempt organizations that issue financial statements in accordance with generally accepted accounting principles. The purpose of FIN 48 is to promote greater consistency and transparency in financial reporting with regard to accounting for income taxes.
FIN 48, an interpretation to FASB 109, Accounting for Income Taxes, requires an organization to follow a specific methodology when analyzing and reporting its “income” in order to ensure consistency in accounting for income taxes. An exempt organizations’ tax positions may include a tax position in connection with unrelated business income including its alternative investment portfolio; an organizations’ activities in another state or foreign country; an organizations’ decision to not file a tax return; or an organization's decision to not pay income taxes. For an exempt organization, exemption itself is also a tax position.
There are two key steps in the FIN 48 analysis of any uncertain tax position: recognition and measurement. The “recognition step” requires the organization to evaluate each tax position to determine whether it meets the “more likely than not” standard. That is, whether there is a greater than 50% chance that the tax position will be sustained on examination by the respective taxing authority based upon the technical merits of the tax position. If a tax position meets the “more likely than not” standard, the second step in the analysis is measurement. In this step, the organization must determine what the tax would be upon effective settlement of the issue.
An exempt organization is required to disclose its liability for uncertain tax positions under FIN 48 on Schedule D of Form 990, Return of Organization Exempt from Income Tax. The portion of the FIN 48 footnote that addresses the filing organizations’ liability for income taxes must be disclosed verbatim on Schedule D of Form 990. Examples of such include the description of liability for unrelated business income tax or tax that may be assessed as a result of the organizations’ revocation of exempt status.
Although exempt organizations may be inclined to do only the bare minimum to comply with the FIN 48 requirements, best practices suggest that an exempt organization take a fresh look at the tax positions it has taken and to record and document each tax position, including the relevant tax authority for each position. Schneider Downs recommends taking an inventory of Form 990 and 990-T reporting positions, reviewing joint ventures and revenue streams and reviewing the organization’s exemption application. In addition to documentation, the exempt organization should continuously monitor each position to account for any change in facts or change in law.
Schneider Downs is prepared to assist you as you address your organizations’ FIN 48 compliance or disclosure needs. Please feel free to contact Susan Kirsch or Debra Ries at (412) 261-3644, for further information.
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.