Online Filing Now Available for Section 83(b) Elections

Section 83(b) elections have officially joined the 21^st century; new Form 15620, which the IRS created last year to accommodate 83(b) elections, can now be filed online. Here’s what you need to know about it.

Background: What Are Section 83(b) Elections?

Section 83(b) elections allow individuals who have received stock under compensatory arrangements that are not vested to elect to recognize income on the arrangements for tax purposes at the time of the transfer, rather than waiting until the stock is vested to recognize this income.

Section 83(b) elections aren’t available for most compensatory equity arrangements because most arrangements don’t allow the underlying stock to be transferred to the holder until the arrangement has vested. Most stock options can’t be exercised until the vesting conditions have been fulfilled. Similarly, the stock underlying restricted stock units isn’t issued to the award holder until the award has vested.

There are, however, some arrangements that allow the holder to acquire stock that is not yet vested. I describe two such arrangements below. For more information on situations where a Section 83(b) election might filed, see  “To 83(b) or Not To 83(b)?”

Early Exercise Options

Early exercise options are stock options that allow the holder to exercise the option before the option has vested. Option holders that choose to take advantage of this opportunity receive stock that is restricted, meaning that the holders can’t sell the stock until the vesting conditions are fulfilled. In addition, if the holders fail to meet the vesting conditions, they will forfeit their underlying stock (and typically receive a refund of the amount they paid for it).

[In most cases, the holders don’t take possession of the stock until the vesting conditions are fulfilled. Although the holders are considered the beneficial owners of the stock and will generally have both voting and dividend rights, the stock is typically held in an escrow or custodial arrangement until vested.]

In this circumstance, the US tax code assumes that the holder will want to wait to pay tax on the stock until the stock can be sold and is no longer subject to forfeiture. But, under Section 83(b), the holder can elect to recognize income at the time of the exercise.

If the option is a nonqualified stock option, the Section 83(b) election accelerates the recognition of compensation income to the exercise date. For incentive stock options, the Section 83(b) election applies only to the income recognized for AMT purposes.

Restricted Stock Awards

A restricted stock award is an arrangement in which the holder receives stock that is subject to vesting restrictions. Unlike an RSU, which is a promise to deliver stock to the holder in the future if the vesting conditions are fulfilled, the shares underlying restricted stock are issued to the holder at grant.

[Just like with early exercise options, holders of restricted stock typically don’t take possession of the stock until the vesting conditions are fulfilled. Although the holders are considered the beneficial owners of the stock and will generally have both voting and dividend rights, the stock is typically held in an escrow or custodial arrangement until vested.]

Normally, restricted stock is subject to tax upon vest, but recipients of restricted stock can elect under Section 83(b) to recognize compensation income for the acquisition of stock at the time the award is granted.

Filing a Section 83(b) Election

Until recently, there was no specific form available to file a Section 83(b) election. Instead, taxpayers simply wrote a letter to the IRS explaining that they were making an election under Section 83(b) and included all the information necessary to file the election, as stipulated under Section 83(b) and related Treasury regulations.

This lack of an official election form has resulted in taxpayers sometimes failing to include all the required information in their filings. I also imagine that it makes it more challenging for IRS auditors to review the election filings. In 2012, to help mitigate errors or omissions in Section 83(b) elections, the IRS issued Rev. Proc. 2012-29 to provide a sample Section 83(b) election form.

Last year, to make it even easier to file the election, the IRS created a fill-in form that can be used for this purpose.

Form 15620

New Form 15620 can now be used to file a Section 83(b) election and includes all information required for the filing. The fill-in form is available for download at the IRS website.

Online Filings

When first introduced, although Form 15620 could be completed electronically, the form still had to be printed and mailed to the IRS. The IRS has now taken the form one step further and made it available for online filings. (Not only can the form be filed via a computer 💻, but it can even be filed via a mobile phone 📱. Look how modern the IRS is! What’s next? An AI assistant 🤖 to help you fill it out?)

Here’s how to file Form 15620 online:

1. Go to the mobile-friendly forms page on the IRS website.
2. Find Form 15620 in the list of available forms.
3. Log into ID.me (or create an ID.me account if you don’t have one). Like Login.gov, which is used for EDGAR filings, ID.me is another service that provides multifactor authentication.
4. Complete Form 15620 and submit it.

Taxpayers can save a draft of the filing for up to 90 days and can review and print the form before submitting the filing.

Frequently Asked Questions

You probably have some questions about the form. Here’s what I know.

Do taxpayers have to file Section 83(b) elections online?

No, online filing is not required. Although the online version of Form 15620 indicates that online filing is preferred, taxpayers can still file Section 83(b) elections by mail.

Filings by mail can be submitted on Form 15620 (taxpayers can even go through the entire process of completing the form online and choose to print and mail the completed form). Alternatively, taxpayers can continue to use their own form of election. Form 15620 is simply available as a convenient alternative to drafting and mailing your own election form.

Do taxpayers have to use Form 15620 to submit the filing electronically?

Yes, if taxpayers want to submit their Section 83(b) election electronically, they will have to use Form 15620 to do so. They cannot use their own form of election for electronic filings. Taxpayers that want to use their own form of election will have to mail their 83(b) election to the IRS.

When can taxpayers start using the online form?

It’s available now on the IRS website, so they can start using it now.

Does the taxpayer still have to provide a copy of the filing to the company?

Yes, even if a taxpayer uses the new form and files it electronically, they still must provide a copy of the filing to the company that issued the stock to them. This is required so that the company can properly report any income the taxpayer recognizes as a result of the filing and can withhold taxes on it, if the taxpayer is an employee.

Does the taxpayer have to include a copy of the filing with their tax return?

No, this is no longer required. Those of you who have been around as long as I have may remember that taxpayers used to be required to include a copy of their Section 83(b) election filings with their tax returns.  Because most taxpayers file their tax returns electronically, the IRS and Treasury amended the regs under Section 83 to eliminate this requirement back in 2016.

Can a Section 83(b) election be signed digitally?

Yes, even if submitted by mail, the election can include a digital signature.

Why 15620? Shouldn’t the form be named "Form 83b"?

You’d think so. If I created the form, that's definitely what I would call it (there currently isn't a Form 83 or 83b on the IRS website—I checked. If the form were created by the SEC, that might be what they would call it (e.g., the form for Rule 144 filings is called "Form 144"). But the IRS apparently has a different system for assigning form numbers. Go figure. 15620 was the highest form number in use on the IRS website when the form was created, so I guess it was the next available number.

Thanks to Bruce Brumberg of myStockOptions.com for alerting me to this development.