US Treasury Warns Taxpayers Against Making Frivolous Tax Claims From Stock Options

by Leroy Baker, Tax-News.com, New York

30 March 2004

The Treasury Department and the IRS last week issued a notice cautioning taxpayers against promoters who purport to offer ways in which they can avoid income tax or alternative minimum tax (AMT) via the exercise of stock options.

The notice warns taxpayers that any claims made by taxpayers will be treated as frivolous in appropriate cases and outlines the various civil and criminal penalties that could apply.

Acting Assistant Secretary for Tax Policy Greg Jenner explained that:

“We are alerting taxpayers to be wary of unsupported claims that stock option gains are not subject to income tax or AMT. Taxpayers should be very cautious about claiming refunds on this basis.”

Gains from the exercise of non-statutory stock options are generally subject to ordinary income tax. Statutory stock options (which include incentive stock options) are not subject to ordinary income tax when they are granted to an employee or exercised by the employee. However, gains on statutory stock options are subject to AMT when the options are exercised.

There are two basic types of stock options - 'non-statutory stock options' and 'statutory stock options'.

The notice describes several claims that promoters are encouraging taxpayers to make for the purpose of claiming refunds of ordinary income tax or AMT on their stock options, and cautions taxpayers that these claims are often unsupportable and will be treated as frivolous in appropriate cases.

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