IRS revises payroll reporting procedures following trade or business acquisitions.

The IRS recently issued Rev Proc. 96-60, describing payroll reporting procedures after certain business acquisitions. This revenue procedure, which makes changes to and supersedes Rev. Proc. 84-77, applies when one company (successor) acquires substantially all of the property of another (predecessor), and continues to employ the workers of the predecessor firm in the same calendar year in which the acquisition occurs. This type Of acquisition is commonly referred to as an "asset" deal, in which the acquirer purchases assets and takes over employees, but does not acquire the target company's stock. This revenue procedure does not apply when one company is absorbed by another in a statutory merger or consolidation.

The revenue procedure describes both the standard procedure and an alternate procedure available to the successor and predecessor companies to use in filing the following forms: Form W-2, Wage and Tax Statement; Form W-3, Transmittal of Income and Tax Statements; Form 941, Employer's Quarterly Federal Tax Return; Form W-4, Employee's Withholding Allowance Certificate; and Form W-5, Earned Income Credit Advance Payment Certificate.

Standard Procedure

Under the standard procedure, the predecessor performs all reporting duties for the wages and other compensation it pays, including the filing of the quarterly Forms 941 and the furnishing and filing of Forms W-2 and W-3. In connection with the successor's acquisition of property and hiring of employees from the predecessor, the predecessor may go out of business and cease to pay wages. In that case, the predecessor must file Form 941 for the quarter in which the acquisition occurs as a final Form 941.

If a final Form 941 is to be filed, the predecessor is also required to furnish Forms W-2 to its former employees on an expedited basis. The Forms W-2 are due on or before the date required for filing the final Form 941. If the predecessor is required to file Form 941 on a monthly basis, the Forms W-2 are due on or before the last day of the month in which the final Form 941 is required to be filed. The predecessor must also file Forms W-2 and W-3 with the Social Security Administration (SSA) no later than the last day of the second month following the period for which the final Form 941 is required to be filed. However, if the predecessor remains in business and continues to pay wages, a final Form 941 is not required. Instead, the predecessor would file its quarterly Form 941 for the quarter of the acquisition. The successor, under the standard procedure, performs all the reporting duties for the wages and other compensation it pays from the date of acquisition forward.

If a final Form 941 is not required, the predecessor and successor both must furnish Forms W-2 to their respective employees no later than January 31 of the following calendar year. If an employee requests the Form W-2 earlier, however, the Form W-2 must be furnished within 30 days of the written request, or within 30 days after the final payment of wages to the employee (whichever is later), provided the 30-day period ends before January 31. The predecessor and successor must file Forms W-2 and W-3 for their respective employees with the SSA no later than the last day of February of the following calendar year.

The predecessor must keep on file the Forms W-4 and W-5 provided by its former employees. The transferred employees must provide the successor with new forms, as the successor now becomes responsible for deducting and withholding taxes from wages paid to the transferred employees.

Alternate Procedure

Under the alternate procedure, if the predecessor and successor so agree the predecessor will be relieved of furnishing Forms W-2 to any transferred employees. In such circumstances, the transferred employees presumably will be paid wages by the successor in the same calendar year and the Forms W-2 furnished to the transferred employees by the successor for the year will include wages paid, and taxes withheld, by both the predecessor and the successor. The predecessor will also be relieved of filing Forms W-2 with the SSA for the transferred employees The predecessor's Form W-2 reporting obligations for the transferred employees will be assumed by the successor.

If the predecessor is not required to file a final Form 941, the predecessor must furnish Forms W-2 to employees not employed by the successor by January 31 of the following calendar year. Forms W-2 and W-3 filed by the predecessor with the SSA for employees not employed by the successor are due the last day of February of the following calendar year. If the predecessor is required to file a final Form 941, the predecessor must furnish Forms W-2 to the employees not employed by the successor on an expedited basis (as described earlier).

To the extent wages paid and taxes withheld by the predecessor are to be included in the Forms W-2 furnished to the transferred employees by the successor, there will be a difference between the amounts shown on the predecessor's Form W-3 and its Form 941. When the predecessor files its Form 941, it should attach a statement explaining the discrepancy and including the name, address and identification number of the successor and a reference to the revenue procedure; this Form 941 cannot be filed electronically. There will be a corresponding difference for the successor, and the successor should file a similar statement with its Form 941.

Under the alternate procedure, the predecessor must transfer to the successor all current Forms W-4 and W-5 that were provided to the predecessor by the transferred employees. The successor must keep the transferred Forms W-4 and W-5 on file, and deduct and withhold from the wages it pays to the acquired employees according to the information supplied on those forms, until an employee submits a revised form.

The standard procedure allows the predecessor employer to separately report the wages it paid to its employees now employed by the successor. However, the alternate procedure allows the predecessor employer to completely shift the payroll reporting responsibilities for transferred employees to the successor. The advantages and disadvantages of each procedure will depend on the specific facts and circumstances of each situation.

FROM THOMAS L. KLAER, CPA, SOUTH BEND, IND.