CommentLetterIRSsec83belections2 10 23.pdf

Re: Request to Make Electronic Signatures Permanent and Allow E-Filing for Section 83(b) Elections

The undersigned organizations appreciate the efforts the Internal Revenue Service (IRS) has taken throughout the pandemic to protect employees, taxpayers, and their representatives while executing its mission. In particular, we appreciate the IRS’ efforts to deviate from its normal practice by:

1. Allowing taxpayers to use electronic or digital signatures when signing certain forms that normally would require a handwritten signature, and

2. Permitting expanded electronic transmission alternatives for certain documents.

These changes have enabled the IRS to continue promoting timely filing while at the same time recognizing the preferences of Americans during the pandemic. In November of 2021, the IRS granted temporary pandemic-related relief allowing elections under sec. 83(b) to be signed electronically. This limited signature relief is authorized through October 31, 2023. We recommend making this electronic signature relief permanent.

Additionally, we note that taxpayers are still required to physically mail in paper submissions of their sec. 83(b) elections. We recommend allowing the sec. 83(b) election forms to be e-filed on a permanent basis.

The Inflation Reduction Act (Public Law No: 117-169) provided an additional $80 billion to fund the IRS, with $4.75 billion allocated for agency modernization. We encourage the IRS to direct the appropriate funds towards prioritizing taxpayer services, including the expansion of e-filing forms to include sec. 83(b) elections.

BACKGROUND

The sec. 83(b) election enables founders, employees, and other service providers who are granted compensatory equity (or other property), subject to vesting, to be taxed on the value of such equity on the grant date on which the equity is acquired rather than a later date when the equity vests or becomes transferable. Making a timely election can have a substantial impact on tax liability and planning for new business owners and employee-owners. To timely file a sec. 83(b) election within 30 days of receiving an equity grant (or early exercising a stock option), a taxpayer prints two copies of the election, physically signs them with a wet ink signature, and sends them via certified mail, along with a cover letter and self-addressed return envelope to the IRS. The taxpayer then waits for the IRS to stamp and return a copy. This process is outdated, inefficient, and burdens already strained IRS resources. It also imposes an onerous process on filers and often leaves them uncertain of their election filing status.

RECOMMENDATION

Treasury and the IRS should:

1. Permanently allow sec. 83(b) elections to be electronically signed, and

2. Provide taxpayers the option to submit sec. 83(b) elections electronically.

ANALYSIS

The sec. 83(b) election enables a service provider to be taxed on the value of equity (or other property) granted as compensation for services on the date the shares are transferred, rather than on the later date when those shares vest or become freely transferable. The acceleration of the tax timing enables service providers to plan more effectively for their tax burden, reduce the financial barriers to equity ownership, potentially increase the value of their ownership opportunity, and in some cases - offers the service providers with the benefits of being a stockholder. These benefits are particularly important as the United States seeks to broaden its tax base and increase economic opportunity, entrepreneurialism, and wealth creation for more Americans, especially for minority/diverse service providers who have historically faced racial- and gender-based wealth inequality and who have not enjoyed the same access to our capital markets. Our tax filing process should facilitate such opportunities.

1. Permanently allow sec. 83(b) elections to be electronically signed.

Since the IRS’s initial April 2021 memorandum allowing electronic signatures on sec. 83(b) elections and extending the period for electronic signatures on other forms, taxpayers have adapted and appreciated the modernization, efficiency, and effectiveness of the new process. We understand that the IRS is studying possible further extensions of this option as the agency is balancing the e-signature option with critical security and protection needed against identity theft and fraud. We encourage the IRS to allow for electronic and digital signatures of sec. 83(b) elections on a permanent basis to help increase IRS efficiency, improve taxpayer compliance, and possibly reduce the risk of fraud.

Notably, in January 2021, the IRS began accepting online submission of Form 2848, Power of Attorney and Declaration of Representative, including those with typed signatures and signatures generated from third-party software. Under IRS guidance, representatives authorized by a Form 2848 power of attorney (POA) can hand-sign and file sec. 83(b) elections in lieu of the taxpayer. By allowing taxpayers to directly sign and submit their own sec. 83(b) elections electronically, the IRS would avoid unduly benefiting those taxpayers who have the resources to authorize a POA and rely on a third-party to complete their sec. 83(b) filing. Moreover, sec. 83(b) elections do not pose unique concerns of identity theft or fraud when compared to highly sensitive forms already being accepted electronically like POAs, which can grant someone broad access to taxpayer information, or even forms that make payment or request refunds.

2. Provide taxpayers the option to submit sec. 83(b) elections electronically.

There is no official sec. 83(b) election form and the requirement for a handwritten signature and physical mail delivery is not widely known outside of professional tax advisors. This lack of standardized form results in unintentional and costly non-compliance by unsophisticated tax filers, who may not realize their errors, if at all, until after the deadline for compliance has passed. Therefore, taxpayers are forced to find and retain paid preparers for assistance in filing a sec. 83(b) election, which can be difficult for many taxpayers given the limited 30-day filing period and for those who historically have had limited access to professional advice or resources. When tax forms are filed electronically, the data is directly transmitted online from the e-filer’s servers to the IRS’s servers. The process is significantly more efficient compared to transferring data from paper to online input, lessening transmission errors and leading to more accurate data records. Specifically, we recommend that the IRS create a standardized sec. 83(b) election form, using the sample language provided in Rev. Proc. 2012-29.

Although requiring taxpayers to sign by hand could impress upon them the importance and permanence of the decision they are making in filing a section 83(b) election and the care they should take in providing accurate information, there are other ways to ensure that taxpayers understand the consequences of filing the election and the care they should take in filing it. For example, the e-filing process could include screens confirming the identity of the taxpayer, flagging that the election is irrevocable, and helping filers properly and clearly identify the unvested property to which the election would apply.

Multiple organizations support an IRS strategy to focus its efforts on expanding e-filing services and that such an expansion would be cost-effective. For example, a May 2022 report by the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS could save more than $17 million in annual costs by requiring paid preparers of business tax returns to e-file.

As mentioned above, the Inflation Reduction Act provides an additional $80 billion to fund the IRS and support various areas of the organization. The National Taxpayer Advocate recommends in the 2022 Annual Report to Congress that the IRS leverage a portion of its new funding to identify and minimize e-filing barriers for individual and business taxpayers. Furthermore, the IRS’s Fiscal Year 2022-2026 Strategic Plan, which outlines its multi-year priorities, includes a primary goal to expand digital filing capabilities. We support prioritizing this strategy and encourage the IRS to allow e-filing of sec. 83(b) elections to help ease the burden of taxpayer compliance because the current paper filing process is labor intensive and costly.

In recent years, the IRS has taken action to streamline the sec. 83(b) election filing process by removing the obligation to file an additional copy of the form with the taxpayer’s annual return. Our recommendation is another step toward streamlining and modernizing the filing process and reducing administrative costs for the IRS while mitigating taxpayer burdens.

The undersigned organizations recognize and appreciate the challenges of the work that the Treasury and the IRS are doing. We respectfully request an expansion of the action you have already taken to provide adjustments to the e-signature guidance and authentication requirements for sec. 83(b) elections and assess permanent reforms to the sec. 83(b) e-signature and filing process.

We appreciate your consideration of these recommendations and welcome the opportunity to discuss these issues further. If you have any questions, please feel free to contact Amy Miller, Director of Public Policy at Carta, at (610) 742-2612 or amy.miller@carta.com.

Sincerely,