August 25, 2005

A New 10-K Disclosure Item

There is a new 10-K disclosure item created by the Jobs Act. This Cleary Gottlieb alert sums it up best: “This is to alert you to a new Form 10-K disclosure item that you will not find in any of the usual places. Section 811 of the American Jobs Creation Act of 2004 added a new Section 6707A to the Internal Revenue Code. Section 6707A(e) of the Code provides for the imposition of a tax penalty, in the amount of $200,000, for the failure by a taxpayer to disclose certain tax information in its Form 10-K filed with the SEC. On August 12, 2005, the IRS issued rules, in the form of Revenue Procedure 2005-51, implementing the disclosure requirement.

Generally, the Form 10-K disclosure requirement is triggered if the registrant, or any entity “required to be consolidated with [the registrant] for purposes of the” Form 10-K, is required to pay a penalty to the IRS arising from a failure to satisfy special tax return disclosure requirements applicable to certain types of transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose.

The penalty under Section 6707A(e) of the Code also applies to a failure to include the required disclosure in the Form 10-K. Thus, the Revenue Procedure makes it clear that “the obligation to disclose on each successive Form 10-K filed will continue until the person actually discloses its requirement to pay each of the penalties [and] each failure to disclose . . . will give rise to a new, separate penalty . . . that also must be disclosed.”

Generally, the disclosure is required in the Form 10-K for the year with respect to which the IRS demands payment of the applicable penalty. The Revenue Procedure includes specific instructions concerning the nature of the information required to be disclosed. It appears that this disclosure obligation does not apply to registrants that file on Form 20-F.

Obviously, we suggest that persons responsible for the Form 10-K coordinate with their tax colleagues to ensure that they are aware of any demand by the IRS relating to any tax penalty that may give rise to a disclosure obligation.”

Implementing Fraud Prevention Training

In this podcast, Peter Goldmann, Editor & Publisher of the “White-Collar Crime Fighter,” explains how to implement a compliance training module for fraud detection and prevention, including:

– How do companies know if they need to enhance their existing fraud prevention programs?
– How is Web-based learning effective for fraud prevention?
– How exactly do employees take these Web-based courses? How do you gauge their effectiveness?
– What other techniques are available to provide fraud detection training to employees?

We have added this podcast to our many resources in the “Compliance Training” Practice Area.

KPMG Looks Like It Will Remain In The “Final Four”

Today’s WSJ runs an article noting that federal prosecutors were negotiating a possible settlement with KPMG – and have tentatively tapped former SEC Chairman Richard Breeden to serve as an outside monitor at the accounting firm. The article says the two sides were close to an agreement, under which the KPMG would avoid a criminal indictment in connection with its past sales of tax shelters to hundreds of wealthy individuals. That is good news – as we need the Final Four (as I blogged a few months back)!