New employment tax reporting procedures in business acquisitions.

The IRS recently issued Rev. Proc. 96-60, which provides updated procedures (effective Jan. 1, 1997) for the preparation and filing of wage statements after a business (or a portion of a business) is acquired by another entity. The revenue procedure, which supersedes Rev. Proc. 84-77, covers Form W-2, Wage and Tax Statement; Form W-3, Transmittal of Income 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.

The revenue procedure contains expedited filing procedures for wage statements and related information returns required to be filed by the seller if the seller ceases to pay any wages. Failure to file by the accelerated deadlines can result in late-filing penalties. The revenue procedure also modifies the rules addressing the assumption of the wage reporting requirement by the acquiring entity.

The special new procedures must be followed when:

--an employer (the successor) acquires substantially all the property used either in a business of another employer (the predecessor) or used in a separate unit of a predecessor's business, and

--immediately after the acquisition, but in the same calendar year, the successor employs individuals who immediately before the acquisition were employed in the predecessor's trade or business.

Rev. Proc. 96-60 provides two alternative reporting procedures for acquired employees: the standard procedure and the alternative procedure. Additionally, if the predecessor ceases to pay wages, a final Form 941 must be filed and Forms W-2 must be issued on an expedited basis.

Under the standard procedure, the predecessor performs all reporting duties for the wages and other compensation it pays up to the date of acquisition, including the filing of quarterly Forms 941 and the furnishing and filing of Forms W-2 and W-3. The predecessor must retain copies of Forms W-4 and W-5 and the "acquired" employees must supply the successor with new Forms W-4 and W-5.

If, in connection with the acquisition, the predecessor ceases to pay any wages reportable on Form 941, the x predecessor must file a final Form 941 c for the quarter of acquisition. Additionally, the predecessor must generally provide the employees with copies of Form W-2 by the due date of the final Form 941. If, however, the predecessor files monthly Forms 94 1, the W-2 must be distributed to the employee by the last day of the month in which the final Form 941 is due. Forms W-2 and W-3 must be filed with the Social Security Administration (SSA) on or before the last day of the second calendar month following the period for which the final Form 941 is due.

If the predecessor does not cease to pay reportable wages, a final Form 941 is not required and the predecessor files its normal Form 941 for the calendar quarter. Additionally, Forms W-2 and W-3 are filed under the normal reporting procedures. If, however, an acquired employee requests a Form W-2 from the predecessor before the normal due date, the predecessor must provide the Form W-2 by the earlier of January 31 of the following year or within 30 days of the request. The successor becomes responsible for reporting any wages or other compensation it pays.

Under the alternative procedure, the predecessor's entire Form W-2 reporting obligation for the acquired employees is assumed by the successor. (This assumption must be agreed to by both parties.) As a result, the predecessor neither issues Forms W-2 to the employees nor files such forms with the SSA. The successor must issue Forms W-2 to the employees that include the sum of the wages paid and tax withheld by both the predecessor and successor during the tax year on or before January 31 of the following tax year (i.e., under normal reporting procedures). Neither the successor nor the predecessor is required to furnish expedited Forms W-2 to the acquired employee or file expedited Forms W-2 or W-3 with the SSA. Additionally, the predecessor must forward all Forms W-4 and W-5 for the acquired employees to the successor.

Under the alternative procedure, the predecessor must attach a statement to its Form 94 1, reconciling the discrepancy between the amounts reported on the Form 941 and the amounts on Form W-3. This statement should explain that the discrepancy results from the alternative reporting procedure. Additionally, the statement should include the successor's name, address and identification number, and a reference to Rev. Proc. 96-60. Similarly, the successor must attach a statement to its Form 941 explaining the discrepancy between the Form 941 and the amounts reported on Form W-3 that results from the alternative reporting procedure. The statement should include the predecessor's name, address and identification number and a reference to Rev. Proc. 96-60. Neither Form 941 filed under the alternative procedures may be filed electronically.

From Thomas M. Cryan, J.D., and Mary B. Doyle, CPA, Washington, D.C.