IRS offers relief on option taxes

Firms could help pay workers' penalties

February 09, 2007|By San Jose Mercury News

SAN JOSE, Calif. -- Providing relief to hundreds of thousands of rank-and-file workers who face big tax bills because they received backdated stock options, the Internal Revenue Service said yesterday that companies can step up and help employees pay the hefty penalties from the tainted options.

Workers would still be on the hook to pay income or capital gains taxes on the discount, however, as they would normally. The taxes collected by the IRS from this program will not be less than what it would have otherwise gotten.

But companies won't have long to think over the IRS' offer: They must notify the IRS by Feb. 28 if they intend to take the offer, which does not extend to top executives and corporate insiders. The companies must contact affected employees by March 15, and they have until June 30 to tote up the taxes and pay the bill.

"This shameful practice was widespread," IRS Commissioner Mark W. Everson said in a news release. "We are allowing employers to satisfy the tax obligations of employees who did not knowingly participate in these schemes."

The backdating scandal - which has entangled scores of companies nationwide - has caused a wide range of collateral damage for workers. For example, incentive stock options issued at a discount may be stripped of their tax advantages. As a result, workers and their employers could owe income and payroll taxes on options they exercised in the past.

In addition to the tax worries, many companies also have been forced to impose indefinite "blackout" periods that have barred workers for months from exercising options or buying shares of company stock at a discount through popular employee stock purchase plans, or ESPPs, that can add thousands of dollars to a worker's annual pay.

But the biggest worry was the impact of new rules, commonly referred to as Section 409A, that impose a 20 percent plus interest tax on discounted options.

In an effort to spare hundreds of thousands of rank-and-file workers from audits and penalties, the Big 4 accounting firms and two high-powered law firms lobbied the IRS to let companies step up and pay a fraction of the taxes owed. Under that proposal, employees would be allowed to keep their improperly discounted options and companies would pay that 20 percent tax on the discount.

Yesterday's announcement allows companies to do just that, if they sign up in time. If they miss the deadline or choose not to participate, employees will be liable for all the taxes.

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