Notes to Consolidated Financial Statements continued During 2017, the valuation allowance increased approximately $0.8 billion. The balance of the valuation allowance at December 31, 2017 and the 2017 activity is primarily related to state and foreign taxes. Unrecognized Tax Benefits A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows: (dollars in millions) 2017 2016 2015 Balance at January 1, $ 1,902 $ 1,635 $ 1,823 Additions based on tax positions related to the current year 219 338 194 Additions for tax positions of prior years 756 188 330 Reductions for tax positions of prior years (419) (153) (412) Settlements (42) (18) (79) Lapses of statutes of limitations (61) (88) (221) Balance at December 31, $ 2,355 $ 1,902 $ 1,635 Included in the total unrecognized tax benefits at December 31, 2017, 2016 and 2015 is $1.9 billion, $1.5 billion and $1.2 billion, respectively, that if recognized, would favorably affect the effective income tax rate. We recognized the following net after-tax (expenses) benefits related to interest and penalties in the provision for income taxes: Years Ended December 31, (dollars in millions) 2017 $ (77) 2016 (25) 2015 43 The after-tax accruals for the payment of interest and penalties in the consolidated balance sheets are as follows: At December 31, (dollars in millions) 2017 $ 269 2016 142 The increase in unrecognized tax benefits during 2017 was primarily related to the acquisition of Yahoo’s operating business. Verizon and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. As a large taxpayer, we are under audit by the Internal Revenue Service (IRS) and multiple state and foreign jurisdictions for various open tax years. The IRS is currently examining the Company’s U.S. income tax returns for tax years 2013-2014 and Cellco Partnership’s U.S. income tax return for tax year 2013-2014. Tax controversies are ongoing for tax years as early as 2005. The amount of the liability for unrecognized tax benefits will change in the next twelve months due to the expiration of the statute of limitations in various jurisdictions and it is reasonably possible that various current tax examinations will conclude or require reevaluations of the Company’s tax positions during this period. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved. 2017 Annual Report | Verizon Communications Inc. and Subsidiaries 91
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