Adopting FASB Interpretation No. 48

In June 2006 the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, commonly referred to as FIN 48. Basically, FIN 48 requires entities to compute income taxes for financial statement purposes by only considering tax positions that are more likely than not to be sustained if the taxing authority examined the position. For purposes of FIN 48, the phrase "more likely than not" means that there is a greater than 50% chance that a tax position would be sustained. Any tax positions that do not meet the more-likely-than-not standard must be disclosed in the financial statements.

At first glance it may appear that FIN 48 does not apply to the Organization because it is a not-for-profit organization that by nature does not pay income taxes. Yet, not-for-profit organizations can and do have taxable income, usually in the form of unrelated business income. In addition, a not-for-profit organization can lose its tax-exempt status for any number of reasons, including failing to further its exempt purpose; private inurement, including employee compensation judged to be unreasonably high; private benefit; political campaign intervention; and lobbying activity that exceeds specified limits. Thus, while FIN 48 undoubtedly will have a greater impact on commercial enterprises, not-for-profit organizations cannot simply ignore it.

The primary focus in adopting FIN 48 should be on the process of identifying uncertain tax positions. As a best practice, we recommend that you first analyze the appropriate documents to ensure that you have identified all of the Organization's tax positions. This process should include:

• A line-by-line review of the Organization's income tax filings (e.g., IRS Form 990) in all significant jurisdictions for all tax years in which the statute of limitations remains open.
• A review of all activities of the Organization, including those performed by volunteers and members of the governing body.
• A review of the Organization's application for tax-exempt status and any related correspondence to and from the IRS.
• A review of your financial statements and trial balances for all legal entities for all open years.
• A review of the minutes of the meetings of the governing body for all open years.
• Discussions with human resource, legal, and financial and accounting personnel.
• A review of the results of prior income tax audits, if any.

Common tax-related matters applicable to not-for-profit organizations that you may need to consider during this process include:

• Do the Organization's activities appear to be in accordance with the tax-exempt purpose specified in the Internal Revenue Code section under which it is exempt or the information filed on its application for tax-exempt status?
• Did the Organization generate any revenue from "business activities" such as fees, publications, advertising, or rental income on debt-financed property? If yes, do any such activities appear to be not substantially related to the Organization's exempt purpose?
• Did the Organization properly classify its revenue on Form 990 as either related or exempt function revenue, unrelated business income, or revenue statutorily excluded from tax?
• Did the Organization engage in any direct or indirect political campaign or lobbying activities?
• Did the Organization engage in any transactions with a current or former trustee, director, officer, or key employee?

Each tax position you identify should then be cataloged (e.g., on an Excel worksheet) and put into one of three categories: highly certain, uncertain, or immaterial. Highly certain positions are those with virtually no tax risk and generally need less documentation, other than a brief description as to why the tax law applies clearly to the particular facts. Uncertain positions are those other than highly certain positions and require additional analysis. Immaterial positions are those positions that should be monitored going forward in case they later become material.

After you have identified all material uncertain tax positions, FIN 48 requires a two-step process for evaluating each position. First, you must determine whether the tax position meets the more-likely-than-not standard. Second, if the standard is met, the position is measured to determine the amount of benefit to recognize in the financial statements.

You may find that FIN 48 will have no effect on your financial statements if there is greater than a 50% chance that all tax positions would be sustained upon examination and the full amount of the tax benefits of those positions would be realized. However, you must be able to support your conclusions regarding FIN 48. FIN 48 prohibits considering the possibility that a return may not be examined or that, even if a return is examined, the position may not be examined. Some organizations may seek formal tax opinions from attorneys or tax professionals to support their financial statement treatment of uncertain tax positions. Furthermore, an auditor can assist an organization in applying the provisions of FIN 48 provided the organization is able to make informed judgments on the results of the auditor's services (for example, understand why tax positions do or do not meet the more-likely-than-not standard and the basis for any unrecognized tax benefit). That way, the organization meets its responsibility for the amounts reported in the financial statements as a result of FIN 48.

FIN 48 has been effective for public companies since 2007 and is essentially effective for all other entities for fiscal years beginning after December 15, 2008 (generally calendar year 2009). The most important lesson that can be learned from the experiences of public companies is to start the FIN 48 process sooner rather than later. Doing so will make you aware of uncertain tax positions while there is still time to address them, as well as to carefully consider how they need to be reflected in your financial statements.