AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
83(b) Election With Wrong Amount Paid
When I filed an 83(b) election form, I stated that no amount was paid for the property. Later, I learned that I did indeed have to pay fair market value for the shares. If I want to correct my mistake, would it be sufficient to send a letter to the IRS office stating that I wish to amend the 83(b) election form, or do I have to go through the procedure required to obtain a private letter ruling? If I do nothing, what is the worst that could happen? Will I just have to pay tax on the value of the shares in 2016 that I would not have had to pay had I filed the form with the correct information? Are there any other potential consequences of my mistake that I should know about? Thank you very much for your time and attention.
Re: 83(b) Election With Wrong Amount Paid
Are you still within the 30-day window for filing the election? If so, send in a corrected election with an explanation. The IRS treats this election as amendable during this time frame.
If it's too late for that, you have a tougher problem. In my view it would not be proper for the IRS to insist that you pay tax on phantom income because of the error in your 83b election, and I believe it's unlikely they would take that approach. The issue is whether they will consider your 83b election to be invalid because of this error. Given the nature of the error, I expect they would not take this harsh approach, but the only way to obtain assurance on that score is to file for a private letter ruling. This is a cumbersome, fabulously expensive process -- think in terms of tens of thousands of dollars -- so this idea probably doesn't make sense unless you can reasonably expect this award to convert into something at least in the high six figures.
The alternative, which provides less assurance but a high probability of success, is to prepare your return based on the correct numbers, attach an explanation that there was an error in the 83b election (I would enclose a corrected version of the election) and hope for the best. Most likely they do nothing and you can proceed based on the corrected election, though you won't be absolutely certain until the statute of limitations runs out on the future return on which you would have reported income if the election was invalid.