Client Alert: IRC 83(b) Election – Some Administrative Filing Relief
Posted on 08.19.15
When an employee receives property (generally stock) in connection with the performance of services and there are certain restrictions placed on that stock- the employee often has a choice to tax the property currently or defer taxation until the time such restrictions lapse. The property received is taxed at fair market value – so the question becomes – is it better to tax currently (at what is typically a lower fair market value), but risk that the restrictions do not lapse and the stock is never awarded or defer taxation until receipt of the property is certain (when the fair market value and related income is likely higher). If an employee chooses to elect to tax the restricted property currently, the IRS has specified very strict rules related to the making of IRC 83(b) elections. The taxpayer must file an election with the IRS within 30 days of the transfer, provide a copy of such election to his/ her employer and attach a copy of such election to his/ her Form 1040 for the year including the IRC 83(b) election.
In PLR 20158001 recently issued, the IRS provided relief for a taxpayer who failed to attach a copy of the valid election to his income tax return filed for the year of transfer. The IRS ruled that the taxpayer’s election was valid. The IRS has also issued proposed regulations eliminating the requirement that taxpayers submit a copy of the IRC Section 83(b) election with their tax returns for the year the property is transferred. Eliminating the need to attach a copy of the election to the taxpayer’s return will promote e-filing of tax returns as this election is currently not permitted as an e-file attachment. The proposed regulations will apply to property transfers on or after 1/1/16, but may be relied upon for property transferred on or after 1/1/15. Comments on the proposed rules are due by 10/15/15.
Be warned - the initial election must still be submitted to the IRS within 30 days of the date of transfer and a copy of such election must be provided to the employer. The IRS is typically unforgiving on missing the 30 day election period.
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Source: Thomson Reuters Checkpoint | Practitioners Tax Action Bulletins® | Five-Minute Tax Briefing® | No. 2015-14 | July 28, 2015