IRS Simplifies Filing Requirements for Section 83(b) Elections

On July 25, the IRS released final regulations eliminating the requirement that taxpayers making a Section 83(b) election file a copy of the election notice with their federal income tax return.  Under Section 83, the fair market value of property received (less any basis in the property) for the performance of services is generally included in income when the property is no longer subject to a substantial risk of forfeiture or when the taxpayer’s interest in the property is transferable.  However, taxpayers may elect under Section 83(b) to include the property’s fair market value (less any basis in it) as of the date of transfer in income in the year of transfer.  Despite the upfront tax liability, this election may actually defer taxation on the appreciated value of the property and subject the appreciation to capital gains rates rather than ordinary income rates.  Under the prior regulations, taxpayers who make an 83(b) election must submit to the IRS a copy of the election notice not only within 30 days after the date of the transfer, but also with their federal income tax return for the year of the transfer.  Last summer, the Treasury and the IRS proposed to eliminate the latter filing requirement, and after receiving no comments, adopted the final regulations without modification.

The requirement to file an election notice with the annual return was duplicative and easy to miss because taxpayers making an 83(b) election were already required to submit to the IRS the election notice within 30 days after the date of the transfer.  Further, as the IRS explained in the preambles to the proposed regulations, this requirement had become an obstacle to electronic filing of returns for certain taxpayers, since commercial e-filing software does not consistently allow for submitting an 83(b) election notice with the return.  The final regulations apply to transfers on or after January 1, 2016, and taxpayers can also rely on these regulations for transfers in 2015.  As a result, taxpayers are not required to file a copy of any 83(b) election made in 2015 with their 2015 tax returns.

Significantly, the final regulations ease compliance for non-resident alien employees of multinational companies.  Although foreign tax consequences can make transfers of restricted stock to such employees undesirable from the employee’s perspective, it may be desirable for the employee to make a section 83(b) election when restricted stock is transferred.  This is particularly true for start-ups and other companies where the value of the shares is small when granted and is likely to increase.  (It is often undesirable to make an 83(b) election for a mature company where the value of the stock is high at transfer and may decline.)

When nonresident alien employees working outside of the United States receive non-vested equity compensation, they may have no obligation to file a U.S. tax return, and could easily neglect to file a return for purposes of filing the election notice.  (Because the employees are nonresident aliens working outside the United States, the income from their 83(b) elections would presumably be foreign source income resulting in no U.S. income tax due in the year of transfer.)  But if these employees become U.S. residents between the grant and vesting dates, their failure to file nonresident returns and attach the 83(b) election notices would invalidate their 83(b) elections, thereby subjecting the value of the property to U.S. income tax upon vesting based on their U.S. resident status at the time of vesting.  Under the final regulations, these employees – and any other service providers – must simply file an election notice with the IRS within 30 days after the date of the transfer.

Although the final regulations simplified filing obligations under Section 83(b), the IRS emphasized taxpayers’ recordkeeping responsibilities under Section 6001, especially to show the basis of property reported on taxpayers’ returns.  Thus, to protect themselves from tax-return audit liability, executives and other service providers who receive restricted property under an 83(b) election must be careful to keep records of the original cost of the property received, and retain the records until at least the period of the limitations for the returns expires.

New ITIN Requirements in PATH Act Pose Challenges for Taxpayers and IRS

The PATH Act, signed into law in December 2015, may cause trouble for nonresident aliens who use individual tax identification numbers (ITINs) to file U.S. tax returns, as it creates additional hurdles to maintain a valid ITIN.  First, ITINs granted before 2013 must be renewed between 2017 and 2020 pursuant to a staggered schedule or they will expire.  Second, if an individual fails to file a U.S. tax return for three years, their ITIN will expire.  Third, the Treasury must adopt a system that will require in-person ITIN applications.

The new requirements are part of Congress’s attempts to reform certain IRS programs in order to improve their reliability, but it will likely inconvenience many taxpayers seeking to acquire ITINs.  Nonresident alien individuals need to obtain an ITIN to complete a Form 8233 asserting treaty relief from withholding on personal services income.  The process is already a difficult one for many nonresident alien taxpayers due to various procedural hurdles—such as obtaining a written denial letter from the Social Security Administration—that already existed.  Moreover, many nonresident aliens whose income is exempt from U.S. tax under a treaty do not file a Form 1040-NR and attach Form 8833 as required.  The changes in the PATH Act may force them to meet this filing requirement.

The result of the changes will increase the volume of applicants, since many will need to be renewed in the coming years.  Speaking at the recent American Bar Association Section of Taxation meeting in Washington, D.C., Julie Hanlon-Bolton, a representative from the IRS Wage and Investment Division, stated that the IRS is currently debating whether the ITIN offices will require additional staffing, and whether new or expanded offices may be needed in Austin, Texas.  This would require employing additional certified acceptance agents.  A certified acceptance agent is someone who has been trained to verify the authenticity of identification documents and trained in the process for a person to apply for an ITIN.