Tax consequences of backdating options
FAQs for Compliance Resolution Program 2007-18 IR-2007-30, Feb.
8, 2007 WASHINGTON — Internal Revenue Service officials today announced an initiative aimed at providing relief for rank-and-file employees affected by their companies’ issuance of backdated and other mispriced stock options.
While the program will be available to help these employees who may be unaware that they held backdated options, the opportunity will not be available for backdated options exercised by most corporate executives or other insiders.
If an employee exercised a ‘backdated’ stock option in 2006, the employee may owe an additional 20-percent tax, plus an interest tax, under the Federal tax laws governing deferred compensation.
If the option had been properly priced, the employee normally would only have owed income tax on the difference between the value at the date of grant and exercise.
The initiative, described in Announcement 2007-18, allows companies to step forward and pay the additional 20-percent tax and any interest tax that employees owe.
We continue to pursue these cases and work closely with the Securities and Exchange Commission and the Justice Department as appropriate." This initiative does not involve or affect any other federal agency’s investigations or regulatory action.
Under a 2004 law, the tax consequences associated with backdated and other mispriced stock options issued at a discount affect most recipients who exercised their options in 2006.
If these stock options were issued to the employees at a below-market price, the 2004 law requires an additional 20-percent tax and interest tax on options exercised in 2006.
The law does not affect options that were earned and vested before 2005.
Under this initiative, employers must notify the IRS of their intent to participate by Feb. The employers, in turn, will be required to contact affected employees by Mar.