18. Income taxes

The Company’s components of income from continuing operations before income taxes and the corresponding provision for income taxes is as follows (in thousands):

The provision for income taxes differs from that which would have resulted from the use of the federal statutory income tax rate as follows (in thousands):

During the year ended September 30, 2012, the Company recorded the correction of an error of $2.7 million. The Company does not believe this correction is material to its consolidated financial statements.

The significant items comprising the Company’s deferred tax assets and liabilities as of September 30, 2012 and 2011 are as follows (in thousands):

Due to deferred tax assets and liabilities in different tax jurisdictions, the net long-term assets and liabilities are reflected on the accompanying consolidated balance sheet as follows (in thousands):

At September 30, 2012, the Company’s overseas subsidiaries held approximately $108 million of cumulative earnings. We do not provide for U.S. income taxes on these undistributed earnings as we do not have the intention or the need to repatriate these funds. If we were to transfer these funds to the United States, the Company would be required to accrue and pay additional taxes. We have not attempted to quantify the charges which might arise if we were to make this transaction. The charges would vary based upon tax legislation in the United States and the other overseas jurisdictions as well as the manner and timing in which MAXIMUS would make these transactions. The amount of taxes that may be applicable on earnings planned to be reinvested indefinitely outside the United States is not readily determinable given the various tax planning alternatives the Company could employ should it decide to repatriate these earnings.

The Company had $9.5 million of net operating loss carryforwards in the United States at September 30, 2012, resulting in a deferred tax asset of $4.2 million. This balance relates exclusively to the losses held by PSI upon their acquisition in 2012. Although the ability of the Company to use these loss carryforwards will be restricted to an annual allowance, the Company has sufficient profits and time within the jurisdictions where losses have arisen to ensure that these losses will be utilized in full. Accordingly, no reserve has been recorded against these balances. These net operating loss carryforwards expire between 2027 and 2031.

The Company had $5.0 million of net operating loss carryforwards in Canada at September 30, 2012, compared with $4.0 million at September 30, 2011. This results in a deferred tax asset of $1.2 million and $1.0 million, respectively. A reserve of $1.1 million and $1.0 million was applied to these balances at September 30, 2012 and 2011, respectively. These net operating loss carryforwards expire through 2027 to 2031.

The Company had $3.4 million of net operating loss carryforwards relating to its United Kingdom subsidiary, resulting in a current deferred tax asset of $0.8 million. No valuation reserve has been recorded against this balance as management believes it will be recovered in full during the fiscal 2013 year. The net operating loss carryforward does not expire.

The Company had $1.2 million of net operating loss carryforwards relating to its Saudi Arabian subsidiary. This results in a deferred tax asset of $0.2 million, which has been fully reserved.

Cash paid for income taxes during the years ended September 30, 2012, 2011, and 2010 was $44.3 million, $45.2 million and $33.3 million, respectively.

The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is “more-likely-than-not” that the position will be sustained upon examination. The Company’s net unrecognized tax benefits totaled $1.1 million, $1.2 million and $1.5 million at September 30, 2012, 2011 and 2010, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the annual effective income tax rate is $1.1 million at September 30, 2012.

The Company reports interest and penalties as a component of income tax expense. In the fiscal years ending September 30, 2012, 2011 and 2010, the Company recognized interest expense relating to unrecognized tax benefits of less than $0.1 million in each year. The net liability balance at September 30, 2012, 2011 and 2010 includes approximately $0.4 million, $0.3 million and $0.3 million, respectively, of interest and penalties.

It is reasonably possible that the total amount of unrecognized tax benefits could decrease within the next twelve months as a result of settlement of expiration of statute of limitations, which could have an impact on the effective tax rate. It is not anticipated that this balance will exceed $0.1 million. The anticipated reversals are related to state tax items, none of which individually are significant.

The Company recognizes and presents uncertain tax positions on a gross basis (i.e., without regard to likely offsets for deferred tax assets, deductions and/or credits that would result from payment of uncertain tax amounts). The reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

The Company files income tax returns in the United States Federal jurisdiction and in various state and foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations for years before 2009 and is no longer subject to state and local, or foreign income tax examinations by tax authorities for years before 2007. In international jurisdictions, similar rules apply to filed income tax returns, although the tax examination limitations and requirements may vary. The Company is no longer subject to audit by tax authorities for overseas jurisdictions for years prior to 2005.