Final answer:
Uncertain tax positions can arise from the possibility of deductions being disallowed by tax authorities and may lead to increased tax payables or deferred tax liabilities. They include clear tax law instances with likely audits, hence the correct answer is I, II, and III. So the correct answer is option 2.
Step-by-step explanation:
Uncertain tax positions refer to instances where there is uncertainty in tax filings, such as the possibility of deductions being disallowed by tax authorities. These positions can arise even when tax laws are clear if a company anticipates an audit. They impact financial statements by potentially increasing tax expense, through either an increase in tax payables or a rise in deferred tax liabilities.
The correct description of uncertain tax positions is that they include both instances in which tax law is clear and instances in which a company believes an audit is likely. Therefore, the options that correctly describe uncertain tax positions are I (positions for which tax authorities may disallow a deduction in whole or part) and III (these positions give rise to tax expense by increasing payables or increasing a deferred tax liability).
Option II (instances in which the tax law is clear and in which the company believes an audit is likely) is also a part of the description of uncertain tax positions, but it does not, by itself, comprehensively encapsulate the concept. Hence the answer is I, II, and III.