Wells Fargo 2008 Annual Report Download - page 156

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Income tax expense for 2008 and the effective tax rate
included FIN 48 tax benefits of $126 million, as well as the
impact of lower pre-tax earnings and higher levels of
tax-exempt income and tax credits.
The change in unrecognized tax benefits in 2008 and
2007 follows:
We are routinely examined by tax authorities in various
jurisdictions. The Internal Revenue Service (IRS) is currently
examining Wachovia Corporation and its Subsidiaries for
tax years 2003 through 2005 and certain non-consolidated
Wachovia subsidiaries for tax years 2001 through 2006. In
addition, Wachovia is appealing various issues related to
their 2000 through 2002 tax years. Wachovia is also currently
subject to examination by various state, local and foreign tax-
ing authorities. While it is possible that one or more of these
examinations may be resolved within the next twelve months,
we do not anticipate that there will be a significant impact to
the unrecognized tax benefits as a result of these examina-
tions. In October of 2008, Wachovia submitted a nonbinding
acceptance to participate in the IRS resolution offer related
to sale-in, lease-out (SILO) transactions. We are awaiting fur-
ther information from the IRS to evaluate the full impact of
the resolution offer on our financial statements. Acceptance
of the resolution offer could significantly impact our unrecog-
nized tax benefits.
The IRS is examining the 2005 and 2006 consolidated
federal income tax returns of Wells Fargo & Company and
its Subsidiaries. We anticipate the audit phase of this exami-
nation will be completed in 2009. We are also litigating or
appealing various issues related to our prior IRS examina-
tions for the periods 1997-2004. We have paid the IRS the
contested income tax associated with these issues and refund
claims have been filed for the respective years. We are also
under examination in numerous other taxing jurisdictions.
While it is possible that one or more of these examinations
may be resolved within the next 12 months, we do not antici-
pate that these examinations will significantly impact our
uncertain tax positions. We are estimating that our unrecog-
nized tax benefits could decrease by between $350 million
and $3.5 billion during the next 12 months primarily related
to the potential resolution of the Wachovia SILO transac-
tions, statute expirations and settlements.
(in millions) 2008 2007
Balance at beginning of year $2,695 $2,875
Additions:
For tax positions related to the current year 420 203
For tax positions related to prior years 452 105
For tax positions from business combinations (1) 4,308 —
Reductions:
For tax positions related to prior years (266) (82)
Lapse of statute of limitations (80) (244)
Settlements with tax authorities (8) (162)
Balance at end of year $7,521 $2,695
(1) Unrecognized tax benefits from the Wachovia acquisition.
Of the $7,521 million of unrecognized tax benefits at
December 31, 2008, approximately $2,718 million would,
if recognized, affect the effective tax rate. The remaining
$4,803 million of unrecognized tax benefits relates to
income tax positions on temporary differences.
We recognize interest and penalties as a component of
income tax expense. At the end of 2008 and 2007, we accrued
approximately $1,560 million and $230 million for the payment
of interest, respectively. The increase in accrued interest is
primarily related to interest accrued by Wachovia prior to
the acquisition. Interest expense of $62 million (after tax)
and interest income of $34 million (after tax) was recognized
for 2008 and 2007, respectively, as a component of income
tax expense.
We are subject to U.S. federal income tax as well as
income tax in numerous state and foreign jurisdictions.
With few exceptions, Wells Fargo and its subsidiaries are
not subject to federal income tax examinations for taxable
years prior to 2005, and state, local and foreign income tax
examinations for taxable years prior to 2004. Wachovia
Corporation and its subsidiaries, with few exceptions, are no
longer subject to federal income tax examinations for taxable
years prior to 2003, and state, local and foreign income tax
examinations for taxable years prior to 2000.