Working with taxes and the business reporting requirements for small businesses is a little like being a life guard during shark season. There are the usual dangers of drowning and all the swimmers know about those but there are also the special dangers of shark attack and many of the swimmers aren't aware of those dangers.
Well the sharks (IRS) are at again and with the help of new government regulations will be requiring new reporting requirements for stock and business indebtedness activities.
These are issues that can result in sever penalties but will be missed by many small business owners and sadly even those who have their taxes prepared and their accounting done by professionals won't be advised of these dangers.
So be aware that it's changes like those described in this post that show the need to be sure that you are not only receiving accounting and tax advice but overall advice on all areas of business compliance.
These new Organizational Actions regulations along with the new health care provisions are going to make some of the biggest changes in reporting and compliance requirements for small businesses that have ever taken place.
So be sure that you keep abreast of and consult with advisers that can help with all areas of your business.
Other wise the sharks may come calling.
Are You Ready for New IRS “Organizational Actions” Regs?
The United States has a “voluntary” tax system, which means that taxpayers must compute their own tax liability and report (and pay) it to the IRS. Unfortunately for Uncle Sam, not everyone volunteers. The result is a “tax gap”– the difference between tax liability imposed by law for a given tax year and the amount of tax actually paid. For calendar year 2001 (the most recent year for which data is available), the IRS estimated the tax gap (prior to any enforcement activities) at around $345 billion. That’s a 16.3 percent noncompliance rate.
One approach that Congress has used to close the tax gap has been to impose additional require-ments for reporting information to the IRS. These requirements often get little publicity and can catch taxpayers by surprise. One recent example is new Code section 6045B, enacted in 2008 and effective January 1, 2011.
This provision requires any issuer of stock or indebtedness to file a return within 45 days de-scribing any organizational action that affects the basis of that security. It must also describe the quantitative effect on the basis of the security resulting from the action.
What counts as an “organizational action”? Distributions in excess of a corporation’s earnings and profits, stock splits, mergers, and acquisitions, among other things.
The requirements apply to almost all shares of stock — public and private, domestic and foreign — of any entity treated as a corporation for Federal income tax purposes. The only exceptions are for stock of money market funds and of corporations whose shareholders are “exempt recipients” (such as other corporations, tax exempt entities, or governmental entities).
What if you can’t determine all the facts you need to make the “quantitative effect” calculation within the 45-day filing period? The rules allow you to use reasonable assumptions, provided you file a corrected return within 45 days of determining a different result. If you can’t determine what portion of a distribution is a dividend, you must treat the entire amount of the distribution as a dividend.
Statements regarding the basis change must also be made available to holders and nominees. The IRS may waive the filing of a return if the information is made publicly available (for example, if it’s posted on the company’s website for 10 years).
S corporations and certain mutual funds and REITs can be treated as having met the filing re-quirements if they properly report the information on their timely filed tax returns (including in-formation reporting, such as Schedule K-1s or Forms 2438 and 2439).
Because failure to file the required returns and statements can result in penalties, companies should examine their internal processes to ensure that they can obtain the necessary data to comply with these new requirements on an ongoing basis.
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