AIG 2008 Annual Report Download - page 320

transactions. AIG has paid the assessed tax plus interest and penalties for 1997 and has filed a claim for refund. On
February 26, 2009, AIG filed suit for a refund in the United States District Court for the Southern District of New
York. AIG has also paid additional taxes, interest, and penalties assessed for 1998 and 1999. AIG will vigorously
defend its position, and continues to believe that it has adequate reserves for any liability that could result from the
IRS actions.
On October 6, 2008, AIG notified the IRS of its decision to participate in an IRS settlement initiative with
respect to certain tax payers that participated in targeted leasing transactions. In accordance with FIN 48 and
FSP 13-2, AIG recorded an after-tax charge of $110 million for this matter in 2008.
FIN 48
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax
benefits is as follows:
2008 2007
Year Ended
December 31,
(In millions)
Gross unrecognized tax benefits, beginning of year ....................... $1,310 $1,138
Agreed audit adjustments with taxing authorities included in the beginning
balance .................................................... —(188)
Increases in tax positions for prior years ............................. 1,339 646
Decreases in tax positions for prior years ............................. (322) (189)
Increases in tax positions for current year ............................ 1,092 82
Lapse in statute of limitations ..................................... (26) (1)
Settlements ................................................... (25) (178)
Gross unrecognized tax benefits, end of year ............................ $3,368 $1,310
As of December 31, 2008 and 2007, AIG’s unrecognized tax benefits, excluding interest and penalties, were
$3.4 billion and $1.3 billion, respectively. As of December 31, 2008 and 2007, AIG’s unrecognized tax benefits
included $665 million and $299 million, respectively, related to tax positions the disallowance of which would not
affect the effective tax rate. Accordingly, as of December 31, 2008 and 2007, the amounts of unrecognized tax
benefits that, if recognized, would favorably affect the effective tax rate were $2.7 billion and $1.0 billion,
respectively.
Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At
December 31, 2008 and 2007, AIG had accrued $426 million and $281 million, respectively, for the payment
of interest (net of the federal benefit) and penalties. For the years ended December 31, 2008 and 2007, AIG
recognized $201 million and $170 million, respectively, of interest (net of the federal benefit) and penalties in the
Consolidated Statement of Income.
AIG continually evaluates adjustments proposed by taxing authorities. At December 31, 2008, such proposed
adjustments would not result in a material change to AIG’s consolidated financial condition, although it is possible
that the effect could be material to AIG’s consolidated results of operations for an individual reporting period
Although it is reasonably possible that a significant change in the balance of unrecognized tax benefits may occur
within the next twelve months, at this time it is not possible to estimate the range of the change due to the uncertainty
of the potential outcomes.
314 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)