IRS Finalizes Regulations Removing Requirement to Attach Copy of §83(b) Election to Employee's Return

In the summer of 2015 the IRS published proposed regulations (REG-135524-14) that were to remove the requirement at attach a copy of a §83(b) election with the service provider’s return.  The IRS has now issued those regulations in final form (TD 9779).  The regulations modify Reg. §1.83-2(c) to remove the requirement that a copy of the election be submitted with the service provider’s tax return for the year in question.

The proposed regulations had provided that taxpayers may elect to rely on these regulations for any property transferred on or after January 1, 2015 pending the issuance of final regulations.

In issuing the proposed regulations, the IRS described the problem with the old requirement to attach a copy of the election to the service provider’s return as follows:

In recent years, it has come to the attention of the IRS that many taxpayers who wish to electronically file (e-file) their annual income tax return have been unable to do so because of the requirement in §1.83-2(c) that they submit a copy of their section 83(b) election with their income tax return. Commercial software available for e-filing income tax returns does not consistently provide a mechanism for submitting a section 83(b) election with an individual's e-filed return. As a result, an individual who has made a section 83(b) election may be unable to e-file his or her return and at the same time comply with the requirement in §1.83-2(c) that a copy of the section 83(b) election be submitted with the return. An individual who made a section 83(b) election would be required to paper file his or her income tax return to comply with the requirements under §1.83-2(c).

Thus the proposed regulations’ preamble went on to note:

In order to remove this obstacle to e-filing an individual tax return, the proposed regulations would eliminate the requirement under §1.83-2(c) that a copy of the section 83(b) election be submitted with an individual's tax return for the year the property is transferred. As described in this preamble, section 83(b)(2) requires that an election made under section 83(b) be filed with the IRS no later than 30 days after the date that the property is transferred to the service provider. This statutory requirement provides the IRS with the original section 83(b) election. Section 83(b) elections are scanned by the service center receiving the election, and an electronic copy of the election is generated. The creation of this electronic copy of the section 83(b) election eliminates the need for a taxpayer to submit a copy of the section 83(b) election with his or her individual tax return.

The final regulations adopted the proposed revision without making any changes to the proposal.  Technically the final regulations apply to property transferred on or after January 1, 2016.  However, as was noted above, taxpayers were allowed to rely on the identically worded proposed regulations for transfers on and after January 1, 2015, so no attachments are required on 2015 returns, though the taxpayer could opt to do so if he/she wants.

The preamble of the final regulations contain a warning about the need for taxpayers to keep records of this election or as long as it may be relevant.  As the preamble states:

Taxpayers are reminded of their general recordkeeping responsibilities pursuant to section 6001 of the Code, and more specifically of the need to keep records that show the basis of property owned by the taxpayer. Taxpayers must maintain sufficient records to show the original cost of the property and to support the tax treatment of the property transfer reported on the taxpayers’ returns. Taxpayers must keep these records as long as they may be needed for the administration of any provision of the Code. Generally, this means records that support items shown on a return must be retained until the period of limitations for that return expires. See section 6501 of the Code. A copy of any section 83(b) election made with respect to property must be kept until the period of limitations expires for any return with respect to which the income inclusion or basis of the property is relevant.