IRS Proposed Rules Ease IRC § 83(b) Election Filing Procedure
Author: Rena Pirsos, XpertHR Legal Editor
August 4, 2015
The IRS has issued proposed regulations affecting employees (and other service providers) who wish to make an election under Internal Revenue Code (IRC) § 83(b) with respect to property that is transferred in connection with the performance of services (i.e., stock received from an employer as compensation). The proposed rules ease the current election filing procedure for electronic filers.
An employee may be compensated by an employer with property that is subject to a substantial risk of forfeiture because it is not vested. For example, an employee may receive restricted stock from an employer, but that stock will be forfeited if the employee voluntarily terminates employment before restrictions on the stock lapse. Generally, the value of such property is not included in an employee's taxable income until it vests, or is no longer subject to a substantial risk of forfeiture.
However, current law allows an employee to elect to include his or her restricted stock as income within 30 days of the date the stock is transferred to him or her by making an IRC § 83(b) election. Once an employee makes such an election, the stock becomes subject to federal income and Social Security and Medicare (FICA) tax withholding and federal unemployment (FUTA) tax. Because the forfeiture provision still applies, an employee who makes a § 83(b) election takes the chance that the substantial risk of forfeiture will not lapse. Any subsequent gains in the value of the stock are taxed as capital gains.
An employee must do all of the following things when making a § 83(b) election:
- File the election with the IRS within 30 days after the transfer of the unvested property (in the format specified in Treasury Regulations and IRS guidance);
- Provide a copy of the election to the employer; and
- Include a copy of the election when filing his or her annual tax return for the year in which the election is made.
The proposed regulations remove the current regulatory requirement that a copy of a § 83(b) election must be filed along with the individual tax return for the year in which the property subject to the election was transferred. The IRS explains that this change is needed because commercial software available for electronic filing of individual income tax returns does not provide a means for submitting § 83(b) elections electronically with returns. Those making a § 83(b) election have been forced to file a paper copy of their return in order to comply with the current regulatory requirement.
To remove the current obstacle to electronically filing an individual return, the proposed regulations eliminate the requirement under IRC § 1.83-2(c) that a copy of the § 83(b) election be submitted with an individual's tax return for the year the property is transferred. The proposed regulations provide that, under IRC § 83(b)(2), the election must be filed with the IRS no later than 30 days after the date the property is transferred to the employee/service provider.
Section 83(b) elections will be scanned by the IRS Service Center receiving the election, and an electronic copy of the election will be generated. The creation of this electronic copy of the election will eliminate the need for a taxpayer to submit a copy of the election with his or her individual income tax return.
This change is proposed to apply to property transferred on or after January 1, 2016, but taxpayers may rely on the proposed regulations for property transferred on or after January 1, 2015.
The IRS requests public comments on the proposed regulations, which must be received by October 15, 2015. Submissions may be sent electronically via the Federal eRulemaking Portal (search for "IRS REG-135524-14").