300691 More Likely than Not Tax Position 3D

Question 1

In assessing the “more likely than not” criterion, which of the following is required?

The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.

It shall be presumed that the tax position will be examined by the relevant taxing authority that has all access only to published knowledge concerning the entity.

None of the answer choices are required by the FASB.

Each tax position must be evaluated with consideration of the possibility of offset or aggregation with other positions.

Question #300691

Answer 1

The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.

FASB ASC 740-10-25-7 requires the presumption that the taxing authority has full knowledge of all relevant information even if not published. Each tax position must be evaluated without consideration of the possibility of offset or aggregation:

“In making the required assessment of the more-likely-than-not criterion:

a. “It shall be presumed that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.
b. “Technical merits of a tax position derive from sources of authorities in the tax law (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. When the past administrative practices and precedents of the taxing authority in its dealings with the entity or similar entities are widely understood, for example, by preparers, tax practitioners and auditors, those practices and precedents shall be taken into account.
c. “Each tax position shall be evaluated without consideration of the possibility of offset or aggregation with other positions.”

Question 2

More Likely Than Not

Answer 2

“More likely than not” is a level of likelihood that is more than 50%.

FASB ASC 740-10-30-7

Question 3

Tax Position

Answer 3

A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.

FASB ASC 740-10-20

Question 4

FASB ASC 740-10-25-7

Question 5

2342.02

Answer 5

The FASB defines a tax position as a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring deferred income tax assets and liabilities for interim or annual periods. It also encompasses the following:

a. A decision not to file a tax return
b. An allocation or a shift of income between jurisdictions
c. The characterization of income or a decision to exclude reporting taxable income in a tax return
d. A decision to classify a transaction, entity, or other position in a tax return as tax exempt
e. An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity

Question 6

2342.03

Answer 6

Recognition

An entity must initially recognize the effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. That is, there must be a greater than 50% chance that the taxing authority will agree with the entity taking the tax position (e.g., allowing a particular deduction in the entity’s tax return). If there is only a 50% or less chance that a particular deduction will be allowed, the tax position fails the more-likely-than-not requirement. Accordingly, the entity’s financial statements must reflect that fact; usually this would mean reflecting the additional tax liability in the financial statements.

Question 7

2342.04

Answer 7

The entity must presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Thus, whether the tax position meets the more-likely-than-not requirement must be based on the technical merits of the tax position and not on whether or not the taxing authority is likely to examine that tax position. The entity must therefore assume that the taxing authority will have full knowledge of the tax position that the entity has taken.

Question 8

2342.05

Answer 8

Each tax position must be considered separately; it may not be combined or aggregated with other tax positions.