IRS Allows Digital Signature for Section 83(b) Elections

Earlier this year, the IRS issued a memorandum allowing Section 83(b) elections to be signed with a digital signature.

Background

Section 83(b) elections can be filed when individual receive stock that is not vested; the election is filed to accelerate the point of taxation for ordinary income tax purposes from the date of vest to the date the stock is acquired.  The two most common situations in which a Section 83(b) election might be filed for equity awards are:

1. Exercise of an employee stock option prior to vesting
2. Receipt of an award of restricted stock

In both these situations, taxation for ordinary income tax purposes would not normally occur until the vesting conditions are achieved. In situation #1, filing a Section 83(b) election changes the point of taxation to the date of exercise and in situation #2, the election changes the point of taxation to the date of grant. In both cases, the election also starts the capital gains holding period.

Filing Mechanics

There is not a prescribed form for making Section 83(b) elections. Instead, taxpayers simply write a letter to the IRS informing the service of their election. The letter must include specified information, including the taxpayer’s signature, and must be mailed to the IRS office where the taxpayer files his/her tax return. Because the IRS receives many incomplete 83(b) elections, in 2012 they provided a sample election in Rev. Proc. 2012-29, but taxpayers are not required to use this form (although it is advisable as doing so will help ensure that the election is complete).

The New Procedure

Earlier this year, the IRS issued a memorandum for all services and enforcement employees that temporarily allows the use of electronic or digital signatures for certain tax filings. The memorandum was originally issued in December of 2020 but did not include Section 83(b) elections at that time. The 2021 memorandum adds Section 83(b) elections to the list of filings for which an electronic or digital signature is acceptable.

Only Temporary

The memorandum expires on December 31, 2021. Unless the IRS chooses to extend it, at that time manual signatures will once again be required for Section 83(b) elections. Moreover, as noted by Shearman and Sterling in their client alert on the IRS memorandum, the IRS reserves the right to revise list of forms for which electronic or digital signatures is permitted at any time. Consequently, taxpayers should verify that Section 83(b) elections are still included in the list before relying on the memorandum.

More Changes to Come?

Thomson Reuters notes, in their summary of the memorandum, that this change came about because it was requested in a joint letter to the IRS submitted by a coalition of 48 organizations. According to Thomson Reuters, this letter requests a number of other permanent reforms to the Section 83(b) Election electronic signature and filing process. Thus, we may see additional updates to Section 83(b) election filing procedures in the future.

I have not been able to obtain a copy of the letter, so I’m not sure what the other requested changes are. If any of my readers have the letter and would be willing to share it with me (or knows what suggestions are included in it), I am very curious to learn this information.