News

New 10-K Disclosure Obligation

News Brief
August 25, 2005

By: Cydney Posner

Corporate Counsel has alerted us to a new Form 10-K disclosure item arising under the Jobs Creation Act. That Act created new IRC section 6707A, which provides a monetary penalty for failure to disclose on tax returns required information with respect to specified reportable transactions, including transactions identified by the IRS as abusive or tax avoidance (shelter) transactions. Under IRC section 6707A(e), public companies (including consolidated companies) must disclose in their Forms 10-K the requirement to pay any of the following penalties:

  • the penalty under section 6707A for failure to disclose a listed transaction;
  • the 30% penalty under section 6662A for an understatement attributable to an undisclosed listed transaction or undisclosed reportable avoidance transaction;
  • the 40% penalty under section 6662 for a gross valuation misstatement if the 30% penalty under section 6662A would have applied, but for the application of section 6662A(e)(2)(c)(ii);and
  • the penalty under section 6707A(e) for failure to make the required disclosure in SEC reports of the penalties enumerated above (i.e., new separate penalties will continue to accumulate for each successive failure to disclose until disclosure is made).
A public company must disclose in its Form 10-K, if applicable:

  • the amount of any imposed penalty to which the new procedure applies;
  • whether the penalty has been paid in full;
  • the specific Code provision under which the penalty was determined; and
  • a description of the penalty.
Special rules govern whether disclosure of the 40-percent accuracy-related penalty under Code Sec. 6662(h) is required.

Section 6707A is effective for returns and statements due after October 22, 2004. A public company must disclose the penalty on the Form 10-K that relates to the fiscal year in which the IRS sends the company notice and demand for payment of the penalty or, if the company pays the penalty in full (not including interest) prior to being sent notice and demand, the fiscal year in which the penalty is paid. If the company fails to make the required disclosures, disclosure must be made on the next Form 10-K until the necessary disclosure is made.

IRS Circular 230 Notice: To the extent the above constitutes tax advice, under IRS Circular 230 I am obligated to inform you that it cannot be relied upon by you or any other taxpayer to avoid penalties.

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