Western Union 2010 Annual Report Download - page 26

Our tax returns and positions are subject to review and audit by federal, state, local and international taxing
authorities. An unfavorable outcome to a tax audit could result in higher tax expense, thereby negatively impacting
our results of operations. We have established contingency reserves for material, known tax exposures, including
potential tax audit adjustments with respect to our international operations which were restructured in 2003,
whereby our income from certain foreign-to-foreign money transfer transactions has been taxed at relatively low
foreign tax rates compared to our combined federal and state tax rates in the United States. As of December 31,
2010, the total amount of unrecognized tax benefits is a liability of $671.1 million, including accrued interest and
penalties. Our reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review.
While we believe that our reserves are adequate to cover reasonably expected tax risks, there can be no assurance
that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed our
related reserve, and such resolution could have a material effect on our effective tax rate, financial position, results
of operations and cash flows in the current period and/or future periods. With respect to these reserves, our income
tax expense would include (i) any changes in tax reserves arising from material changes during the period in the
facts and circumstances (i.e. new information) surrounding a tax issue, and (ii) any difference from the Company’s
tax position as recorded in the financial statements and the final resolution of a tax issue during the period. Such
resolution could materially increase or decrease income tax expense in our consolidated financial statements in
future periods and could materially impact our operating cash flows.
The Internal Revenue Service (“IRS”) completed its examination of the United States federal consolidated
income tax returns of First Data Corporation (“First Data”) for 2003 and 2004, of which Western Union was a part,
and issued a Notice of Deficiency in December 2008. The Notice of Deficiency alleges significant additional taxes,
interest and penalties owed with respect to a variety of adjustments involving us and our subsidiaries, and we
generally have responsibility for taxes associated with these potential Company-related adjustments under the tax
allocation agreement with First Data executed at the time of the Spin-off. We agree with a number of the
adjustments in the Notice of Deficiency; however, we do not agree with the Notice of Deficiency regarding several
substantial adjustments representing total alleged additional tax and penalties due of approximately $114 million.
As of December 31, 2010, interest on the alleged amounts due for unagreed adjustments would be approximately
$36 million. A substantial part of the alleged amounts due for these unagreed adjustments relates to our
international restructuring, which took effect in the fourth quarter 2003, and, accordingly, the alleged amounts
due related to such restructuring largely are attributable to 2004. In September 2010, IRS counsel referred the case
to the IRS Appeals Division for possible settlement. On March 20, 2009, we filed a petition in the United States Tax
Court contesting those adjustments with which we do not agree. We believe our overall reserves are adequate,
including those associated with the adjustments alleged in the Notice of Deficiency. If the IRS’ position in the
Notice of Deficiency is sustained, our tax provision related to 2003 and later years would materially increase, which
could materially impact our financial position, results of operations and cash flows. An examination of the United
States federal consolidated income tax returns of First Data that cover the Company’s 2005 and pre-spin-off 2006
taxable periods is ongoing, as is an examination of the Company’s United States federal consolidated income tax
returns for the 2006 post-spin-off period, 2007 and 2008. The Irish income tax returns of certain subsidiaries for the
years 2006 and forward are eligible to be examined by the Irish tax authorities, although no examinations have
commenced. See Note 10 to our consolidated financial statements for a further discussion of this matter.
Western Union has been the subject of class-action litigation, and remains the subject of other litigation as well
as consent agreements with or enforcement actions by regulators.
Western Union has been the subject of class-action litigation in the United States, alleging that its foreign
exchange rate disclosures failed to adequately inform consumers about the revenue that Western Union and its
agents derive from international remittances. These suits were all settled in or before 2004, without an admission of
liability, and we have made changes in our advertising and consumer forms. It is possible that because of changes in
law or future litigation or regulatory action, we could be required to modify our disclosures or our practices further.
These modifications could be costly to implement, restrict our ability to advertise or promote our services, limit the
amount of our foreign exchange income and/or change our consumers’ behavior.
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