Uncertain tax positions under ASC 740

Every company with a tax return has positions a tax authority could challenge. ASC 740 decides how much of the benefit can be recognized in the financial statements, and the unrecognized tax benefits disclosure shows investors how much is at risk. This guide explains the two steps and works through a cumulative probability example.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Uncertain tax positions under ASC 740, formerly known as FIN 48, follow a two-step test. Step 1, recognition: a tax benefit is recognized only if the position is more likely than not to be sustained on examination, based on its technical merits and assuming the tax authority knows all relevant facts. Step 2, measurement: the benefit is the largest amount that is more than 50% likely to be realized on settlement. The difference between the benefit claimed on the return and the benefit recognized is an unrecognized tax benefit, usually a liability.

At a glance

Former name
FIN 48
Step 1
More likely than not to be sustained
Step 2
Largest amount over 50% likely
Detection risk
Ignored
Result
Unrecognized tax benefit liability
Interest and penalties
Policy election for classification
Uncertain tax positions under ASC 740Former name: FIN 48; Step 1: More likely than not to be sustained; Step 2: Largest amount over 50% likely; Detection risk: Ignored; Result: Unrecognized tax benefit liability; Interest and penalties: Policy election for classification.KEY FACTS AT A GLANCEUncertain tax positions under ASC 740Former nameFIN 48Step 1More likely than not tobe sustainedStep 2Largest amount over 50%likelyDetection riskIgnoredResultUnrecognized tax benefitliabilityInterest and penaltiesPolicy election forclassificationTax BakersUncertain tax positions under ASC 740Former name: FIN 48; Step 1: More likely than not to be sustained; Step 2: Largest amount over 50% likely; Detection risk: Ignored; Result: Unrecognized tax benefit liability; Interest and penalties: Policy election for classification.KEY FACTS AT A GLANCEUncertain tax positions under ASC740Former nameFIN 48Step 1More likely than not to be sustainedStep 2Largest amount over 50% likelyDetection riskIgnoredResultUnrecognized tax benefit liabilityInterest and penaltiesPolicy election for classificationTax Bakers
Key facts at a glance, as set out in this guide.

How do the two steps for uncertain tax positions work?

Can the tax benefit be recognized?Can the tax benefit be recognized?Is the position more likely thannot to be sustained on its merits?NoRecognize nobenefitYesIs there a range of possiblesettlement amounts?NoRecognize thefull benefitYesRecognize the largest amount over 50% likely
Step 1 decides whether any benefit is recognized; step 2 decides how much.

The assessment assumes the position will be examined by a tax authority with full knowledge of all relevant information, so the chance of not being audited is ignored. The unit of account, such as each deduction or each year, follows how the company prepares and supports its returns and how it expects the authority to examine them.

An example: a research tax credit

A company claims a research credit worth $500,000. Its advisers consider it more likely than not that the credit will be sustained, so step 1 is met. They estimate the possible settlement outcomes:

Benefit sustainedProbabilityCumulative probability
$500,00030%30%
$400,00030%60%
$250,00020%80%
$020%100%

Starting from the largest amount, the first outcome with a cumulative probability above 50% is $400,000. The company recognizes a $400,000 benefit and records an unrecognized tax benefit of $100,000, as a liability or as a reduction of a deferred tax asset for a related carryforward.

If instead the advisers put the chance of the credit being sustained at only 40%, step 1 fails and no benefit is recognized at all: the whole $500,000 is an unrecognized tax benefit.

What are common mistakes with uncertain tax positions?

Factoring in the chance that the tax authority will not audit the position, which ASC 740 does not allow; treating a position as highly certain without documented technical support; forgetting state and foreign positions; and failing to release unrecognized benefits when the statute of limitations expires, which leaves liabilities on the balance sheet that no longer exist.

How are interest and penalties treated?

Interest is accrued on the unrecognized tax benefit from the date the tax would have been due, and penalties where the position would not avoid them. A company elects, as an accounting policy applied consistently, whether to classify interest and penalties within income tax expense or within interest expense and other expenses, and discloses the election.

How is the liability presented?

As a liability, classified as current only to the extent payment is expected within a year. Where a net operating loss or credit carryforward is available to settle the disallowed amount, the unrecognized tax benefit is generally presented as a reduction of that deferred tax asset rather than as a separate liability.

When are judgments updated?

When new information arises: completion of an examination, a change in tax law or case law, or the expiry of the statute of limitations. Benefits previously unrecognized are recognized when the position becomes more likely than not to be sustained, is effectively settled, or the statute of limitations expires.

What must be disclosed?

Public business entities provide a tabular reconciliation of unrecognized tax benefits from the start to the end of the year, the amount that would affect the effective tax rate if recognized, interest and penalties recognized, and the tax years open to examination. See ASC 740 explained, and for the IFRS approach, IFRIC 23 and IAS 12 vs ASC 740.

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Questions people ask

What is an uncertain tax position under ASC 740?

A tax position taken or expected to be taken on a return whose benefit may not be sustained on examination. It is assessed using a two-step recognition and measurement test.

What is FIN 48?

The former name of the uncertain tax position guidance, FASB Interpretation No. 48, now part of ASC 740-10.

How is an uncertain tax position measured?

At the largest amount of benefit that is more than 50% likely to be realized on settlement, using cumulative probability.

Where are interest and penalties on uncertain tax positions classified?

Either in income tax expense or in interest and other expense, as an accounting policy election applied consistently.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. FASB Accounting Standards Codification: Topic 740, Income Taxes
  2. Financial Accounting Standards Board

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ASC 740ASC 740 income taxes explainedIAS 12IFRIC 23 uncertain tax treatmentsIFRS vs US GAAPIAS 12 vs ASC 740: income tax differences

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This guide is general information. It is not tax or legal advice for your situation.