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IRS Procures a Document Scanner, Simplifies Section 83(b) Elections

July 27, 2015 Business & Tax Blog Compensatory Property Transfers

Having procured a document scanner, IRS has eliminated the requirement that taxpayers enclose Internal Revenue Code Section 83(b) elections with their income tax returns. When a taxpayer receives property (such as stock or LLC interests in an employer) in exchange for services, the taxpayer normally recognizes the fair market market value of the property as ordinary (regular tax rate) income in the year the property is transferable or is vested (i.e., not subject to forfeiture). A taxpayer can, however, accelerate recognition of income by filing a Section 83(b) election with IRS within thirty days of receiving the property. By doing so, the taxpayer can recognize the property’s value as ordinary income when first granted (when the value may be low) and start his or her long-term capital gain holding period sooner (so the taxpayer is more likely to recognize lower-tax-rate long-term capital gain on a larger portion of gain when the property is later sold). Previously, a Section 83(b) election was valid only if a copy was enclosed with the taxpayer’s income tax return for the year of the election, in addition to filing the election within thirty days of receiving the property. IRS required this because they could not match originally-filed elections with taxpayer tax returns. The absolute rule unfortunately proved a frequent trap for unorganized taxpayers who forgot to include the elections with their tax returns, even though they timely filed original elections. In recent years, some commercial electronic tax filing services had difficulty creating a means for their customers to include Section 83(b) elections with electronically filed returns. This caused some taxpayers to file paper income tax returns just to make sure their Section 83(b) elections were valid. In response to concerns surrounding this issue, IRS created a document scanning process that enables the agency to better match Section 83(b) elections with taxpayer returns, obviating the need to include the elections with taxpayers’ income tax returns. Document scanning is not a new technology. It is disappointing that common sense did not prevail long ago. The taxpayer “trap” has existed for years, but the “fix” only came about when the process became an administrative hassle for IRS. Nevertheless, the new approach is a positive step in tax administration, and we welcome the change. Here is a link to the Proposed Treasury Regulations, effective January 1, 2015:

E. John Wagner, II