Final answer:
Uncertain tax positions are situations where deductions may not be allowed by tax authorities and can impact tax expenses and liabilities; instances with clear tax law do not qualify as uncertain tax positions.
Step-by-step explanation:
Uncertain tax positions can be defined as tax positions taken on a tax return that may be challenged by the tax authorities or are not certain to be sustained on their merits if challenged. The correct answer to the question regarding uncertain tax positions is:
- Are positions for which the tax authorities may disallow a deduction in whole or in part (I).
- Give rise to tax expense by increasing payables or increasing a deferred tax liability (III).
However, uncertain tax positions do not necessarily include instances in which the tax law is clear but the company believes an audit is likely (II). Thus, options I and III apply, making the correct answer: I and III only (b).
The correct answer is a. I, II, and III.
Uncertain tax positions are positions for which the tax authorities may disallow a deduction in whole or in part. These positions can include instances where the tax law is clear, but the company believes an audit is likely. Uncertain tax positions give rise to tax expense by increasing payables or increasing a deferred tax liability.
For example, if a company takes a deduction on its tax return for a certain expense, but the tax authorities later determine that the deduction was not allowed, the company may be required to pay additional taxes and penalties.