IRS Issues Option Tax Warning

March 26, 2004 (PLANSPONSOR.com) - Taxpayer attempts to avoid federal ordinary income tax or alternative minimum tax (AMT) after exercising stock options could be treated as frivolous and could draw civil and criminal penalties, officials warned Friday.

>The US Treasury Department and the Internal Revenue Service (IRS) described claims that promoters are encouraging taxpayers to make to request refunds of ordinary income tax or AMT on their stock options and cautioned that such representations are often “unsupportable.”

   
“We are alerting taxpayers to be wary of unsupported claims that stock option gains are not subject to income tax or AMT,” Acting Assistant Secretary for Tax Policy Greg Jenner said in the announcement. “Taxpayers should be very cautious about claiming refunds on this basis.”

>According to the announcement, gains from the exercise of nonstatutory stock options are generally subject to ordinary income tax.  Statutory stock options (which include incentive stock options) are not subject to ordinary income tax when they are granted to an employee or exercised by the employee. However, gains on statutory stock options are subject to AMT when the options are exercised, the government notice said.

The notice is available at  http://www.treas.gov/press/releases/reports/notice200428.pdf .

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