Your compensation may take several forms, including salary, fringe benefits and bonuses. If you work for a corporation, you might also receive stock-based compensation, such as stock options. These come in two varieties: nonqualified (NQSOs) and incentive (ISOs). With both NQSOs and ISOs, if the stock appreciates beyond your exercise price, you can buy shares at a price below what they’re trading for.
The tax consequences of these types of compensation can be complex. So smart tax planning is critical. Let’s take a closer look at the tax treatment of NQSOs, and how it differs from that of the perhaps better known ISOs.
NQSOs create compensation income — taxed at ordinary-income rates — on the “bargain element” (the difference between the stock’s fair market value and the exercise price) when exercised. This is regardless of whether the stock is held or sold immediately.
ISOs, on the other hand, generally don’t create compensation income taxed at ordinary rates unless you sell the stock from the exercise without holding it for more than a year, in a “disqualified disposition.” If the stock from an ISO exercise is held more than one year, then generally your lower long-term capital gains tax rate applies when you sell the stock.
Also, NQSO exercises don’t create an alternative minimum tax (AMT) preference item that can trigger AMT liability. ISO exercises can trigger AMT unless the stock is sold in a disqualified disposition (though it’s possible the AMT could be repealed under tax reform legislation).
More tax consequences to consider
When you exercise NQSOs, you may need to make estimated tax payments or increase withholding to fully cover the tax. Otherwise you might face underpayment penalties.
Also keep in mind that an exercise could trigger or increase exposure to top tax rates, the additional 0.9% Medicare tax and the 3.8% net investment income tax (NIIT). These two taxes might be repealed or reduced as part of Affordable Care Act repeal and replace legislation or tax reform legislation, possibly retroactive to January 1 of this year. But that’s still uncertain.
Have tax questions about NQSOs or other stock-based compensation? Let us know — we’d be happy to answer them.
A great deal of attention is paid to individual tax identity theft — when a taxpayer’s personal information (including Social Security number) is used to fraudulently obtain a refund or commit other crimes. But businesses can also be victims of tax identity theft.
Business tax identity theft occurs when a criminal uses the identifying information of a business, without permission, to obtain tax benefits or to enable individual identity theft schemes. For example, a thief could use an Employer Identification Number (EIN) and file a fraudulent business tax return to claim a refund or refundable tax credits. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for the “employees” to claim refunds.
In many cases, businesses don’t even know their information has been stolen until they’re contacted by the IRS. The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.
Signs your business could be a victim
There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if you receive:
- A notice from the IRS about fictitious employees.
- An IRS letter stating that more than one tax return has been filed in your business name.
- A notice from the IRS that you have a balance due when you haven’t yet filed a return.
Steps to take
If you receive a letter or notice from the IRS that leads you to believe someone fraudulently has used your business EIN, respond immediately to the contact information provided. Contact us for more information about how to proceed.
With a rise in IRS phone scams, the Agency changed its policy on contacting taxpayers whose tax records are subject to an audit. The new policy instructs IRS agents to contact affected taxpayers only by mail—never by phone (which used to be the IRS’ go-to method of contact). As such, we you to adhere to the following guidelines should you receive a call from someone claiming to be from the IRS and you have NOT received a contact letter prior:
If you receive a phone call that you suspect to be a scam, hang up right away. If you receive multiple calls, try to record them and turn the recordings and any other related information that you have over to the IRS and local law enforcement.
If you receive emails claiming that the sender is from the IRS, save the emails, do NOT click on any links or open files contained within the email, and forward these emails to the IRS at: email@example.com.
Never share your personal information over the phone or by email with someone claiming to be from the IRS. The IRS will never e-mail or call you to ask for this type of information or to ask you to send money right away.
Protect your personal information. Any type of documentation that contains your sensitive data is a treasure trove for tax thieves and identity scammers. Keep documents containing your Social Security Number, bank account numbers, and other sensitive information in a secure location. Electronic forms should be stored on a password-protected or encrypted external drive or disk.
If you have any questions about the risks related to tax and financial scams, please contact our office.
WASHINGTON — The Internal Revenue Service and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS.
Based on the 90,000 complaints that TIGTA has received through its telephone hotline, to date, TIGTA has identified approximately 1,100 victims who have lost an estimated $5 million from these scams.
"There are clear warning signs about these scams, which continue at high levels throughout the nation,” said IRS Commissioner John Koskinen. “Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams are angry, threatening calls from people who say they are from the IRS and urging immediate payment. This is not how we operate. People should hang up immediately and contact TIGTA or the IRS.”
Additionally, it is important for taxpayers to know that the IRS:
- Never asks for credit card, debit card or prepaid card information over the telephone.
- Never insists that taxpayers use a specific payment method to pay tax obligations
- Never requests immediate payment over the telephone and will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior notification of IRS enforcement action involving IRS tax liens or levies.
Potential phone scam victims may be told that they owe money that must be paid immediately to the IRS or they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.
Other characteristics of these scams include:
- Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
- Scammers may be able to recite the last four digits of a victim’s Social Security number.
- Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
- Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
- Victims hear background noise of other calls being conducted to mimic a call site.
- After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
If you get a phone call from someone claiming to be from the IRS, here’s what you should do:
- If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
- If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to TIGTA at 1.800.366.4484.
- If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.
Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.
The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to firstname.lastname@example.org.
For more information or to report a scam, go to www.irs.gov and type "scam" in the search box.
More information on how to report phishing scams involving the IRS is available on the genuine IRS website, IRS.gov.
The IRS has issued a warning about a pervasive phone scam. The Treasury Inspector General for Tax Administration (TIGTA) called it the largest scam of its kind. It has received reports of over 20,000 contacts related to this scam, and thousands of victims have paid over $1 million to fraudsters claiming to be from the IRS.
Potential victims are threatened with deportation, arrest, having their utilities shut off, or having their driver’s licenses revoked. Callers are frequently insulting or hostile—apparently to scare their potential victims. Potential victims may be told they are entitled to big refunds, or that they owe money that must be paid immediately to the IRS. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.
Thieves who run this scam often:
- Use common names and fake IRS badge numbers.
- Know the last four digits of the victim’s Social Security Number.
- Make caller ID appear as if the IRS is calling.
- Send bogus IRS emails to support the bogus calls.
- Make background noise of other calls being conducted to mimic a call site.
- Call a second time claiming to be the police or department of motor vehicles. The caller ID again appears to support their claim.
You should know that that the IRS always sends taxpayers a written notification of any tax due via the U.S. mail. More importantly, the IRS will never ask for credit card, debit card, or prepaid card information over the telephone.
If you get a phone call from someone claiming to be from the IRS, and you think you owe taxes, hang up and call the IRS at (800) 829-1040 or, better yet, call us for help. If you don’t owe taxes or have no reason to think you owe any taxes, hang up and call to report the incident to the Treasury Inspector General for Tax Administration at (800) 366-4484.
Anyone targeted by this scam, should also file a complaint with the Federal Trade Commission using the “FTC Complaint Assistant” at FTC.gov and adding “IRS Telephone Scam” to the comments of portion of the complaint.
It is also important to be on the lookout for possible email scams that use the IRS as a lure. You should know that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs; passwords; or similar confidential access information for credit card, bank, or other financial accounts via email or any other means.
If you receive a suspicious email, do not open any attachments or click on any links contained in the message. Instead, forward the email to email@example.com.