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Unrecognized tax benefits

The liability 10-Ks record for tax positions that may not be fully sustained, with Walmart's policy language and Coca-Cola's 2025 figures.

The short answer

Unrecognized tax benefits are the portion of a company's tax positions that has not been recorded as a reduction of tax expense, because the company judges that the position may not be fully sustained if the tax authority examined it. The amount is a liability (sometimes called a reserve for uncertain tax positions) and is explained in the income-tax note, often with a roll-forward and a sentence about how much would affect the effective tax rate if it were recognized. It is not a finding that the company has underpaid tax. It is the company's own measure of positions that are still open to challenge.

What the liability represents

Companies take positions on their tax returns: how a transaction is characterized, which jurisdiction has the right to tax it, whether a credit applies. Under U.S. GAAP, a benefit is recognized only if the company concludes the position is more likely than not to be sustained on its technical merits. The benefit that does not meet that test, or that is measured below the full amount claimed, is recorded as a liability for unrecognized tax benefits. Walmart's 10-K for the year ended January 31, 2026 states that the company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.

Source: Walmart 10-K for fiscal 2026, filed Mar 13, 2026

Interest and penalties on these positions are often recorded as well, sometimes inside income-tax expense and sometimes in interest or operating expense. Walmart records interest related to unrecognized tax benefits in interest expense and the related penalties in operating, selling, general and administrative expenses. Other companies keep both in the tax line. The income-tax note says which presentation the company uses.

How to read the 10-K disclosure

The income-tax note usually includes a roll-forward of the gross unrecognized tax benefit: the opening balance, additions for current and prior years, reductions for settlements and lapses of statutes of limitations, and the closing balance. It also typically says how much of the total, if recognized, would affect the effective tax rate. Some of the balance may be offset by related deferred tax assets or by positions in other jurisdictions, so the income-statement effect can be smaller than the gross liability.

Coca-Cola's 2025 10-K reports that, as of December 31, 2025, the gross amount of unrecognized tax benefits was $857 million. It then adds that if the company were to prevail on all uncertain tax positions, the net effect would be a benefit of $581 million, exclusive of any benefits related to interest and penalties. The difference is the part that would be offset in other jurisdictions. The same note is also where companies discuss open tax years and examinations.

Source: Coca-Cola 10-K for fiscal 2025, filed Feb 20, 2026

A large balance does not, by itself, say whether the company will ultimately pay or prevail. It tells you how much benefit is still contingent on the outcome of positions the company has taken. Effective tax rate covers the rest of the tax note's rate discussion. Deferred income taxes, a related topic in this set, covers temporary differences and valuation allowances.

Common questions

What is an unrecognized tax benefit?

The part of a tax position that has not been recorded as a tax benefit, because the company judges it may not be fully sustained. Walmart describes it as a liability resulting from uncertain tax positions taken or expected to be taken in a tax return.

Is this the same as a deferred tax liability?

No. A deferred tax liability comes from temporary differences between book and tax bases that will reverse in the ordinary course. An unrecognized tax benefit is a reserve for a position whose outcome is still uncertain.

Why is the net effect sometimes smaller than the gross amount?

Some positions, if lost, would be offset by benefits in other jurisdictions or by related deferred tax assets. Coca-Cola's 2025 10-K reports a gross amount of $857 million and a net effect of $581 million if the company prevailed on all uncertain tax positions, exclusive of interest and penalties.

Where do interest and penalties go?

It depends on the company's policy, which the tax note will state. Walmart puts interest in interest expense and penalties in operating expenses. Other companies include both in income-tax expense.

Does a settlement always reduce earnings?

Not always. If the company had already reserved enough, a settlement can be close to the reserve and have little effect on the current year's tax expense. If the outcome is better or worse than reserved, the difference hits earnings in the period of the change.

Disclosures

Editor holdings: The editor holds no position in any company named on this page. As of Nov 11, 2026.
Compensation: Nobody paid for this page. No affiliate links on this page.
Sources: Each company's own SEC filings, linked next to each number.
Last updated: Nov 10, 2026

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