Will I get caught? (AMT a bitch for ISO's in private company)

April 9, 2011 10:56 AM

Will I get caught if I don’t report the purchase of my PRIVATE COMPANY ISO’s? (AMT is a bitch!)

Here is the *hypothetical* situation... :-)

I have a large amount of stock options in a private startup company. If I leave the company, I will have 90 days to decide whether to exercise my options. Due to the sheer number of options, it will be several hundred thousand $$’s in AMT when I purchase them. But, this isn’t a public company and I can’t sell the shares. So, I’d be in that horrible place of needing to pay a ton of tax on stock I didn’t receive any actual cash from. Because of the messed up AMT ... I will owe enormous taxes on the "paper profits".

While I do expect that the stock will eventually be worth something (and happy to pay the tax at that time), that could be several years from now. And, you never know... the stock may never materialize to anything.

Simple question for anyone that’s been in this position and/or is a tax person and has seen it play out for others: If I simply don’t report the purchase... who will know?? The purchase transaction is essentially just a check from me to my company (doesn’t involve my bank or any public exchanges), so am I just a fool to report this? I’m seriously considering buying the stock and then just paying the tax when I eventually sell the shares. Or, if I even knew what the risks were (I'm happy to pay excessive penalties, but jail time isn't really something I'm too excited about.) Could another option be to report the situation but then ask the IRS for a payment plan so that I can potentially see liquidity on the shares in time to pay the IRS?

I will definitely consult with a tax accountant before deciding my true course of action, but I’d like to start with you guys for general direction, articles, personal experiences, etc. And, I may not leave the company at all... but I want to have a well-formed strategy in any case.

Thanks for whatever ideas you can offer.

posted by sharingideas to Work & Money (9 answers total)

How did you determine that it will be "hundreds of thousands in AMT"? From reading this article is sounds like the key is determining the right fair market value for the shares when you exercise the options. Since you don't have a public share price to use, you can apparently get creative with it (but the IRS has the right to disagree, of course).

What does your accountant/tax person say? You knew we were going to say it, right?
posted by cabingirl at 11:29 AM on April 9, 2011

Response by poster: Good idea. But, the fair market value is not something I can play with. I'd like to say the least I can about the specifics (for obvious reasons), but in my case the fair market value is already set by either a) a 409A valuation done by an external investment bank or b) the share price paid by the last round of investors. It's a very set thing that I can't manipulate.
posted by sharingideas at 11:37 AM on April 9, 2011

Ask the company's auditors and comptroller about the process before doing anything else. You aren't looking at the totality of the transaction when you just examine your payment to the company.

I would strongly advise not trying to cheat the IRS.
posted by rr at 11:59 AM on April 9, 2011

Who will know? Well, you'll be paying someone for the shares, right? Either the company itself or another person holds them. If anyone else involved in the transaction reports the sale, and you don't, you will have to explain why to the taxman.
posted by rodgerd at 12:27 PM on April 9, 2011

Best answer: your ex-employer will have to report the transaction on a form 3921 as of this year. So yeah, you'll get caught.

cite

Enjoy the AMT!!! Still a better deal then what I have as a renting NYC dwelling high income earner.
posted by JPD at 12:38 PM on April 9, 2011 [1 favorite]

Best answer: and yes - you totally could get a payment plan. Its t-bill + 3% - which really isn't a terrible rate (well except for the fact its basically riskless for the IRS since it isn't dischargeable in bankruptcy - but the other options they are competing against will be a lot higher). Your accountant should deal with this for you tho.

Am having memories of the last tech bubble with people getting smoked on taxes for options that ended up worthless. Tax code is a wonderful thing.
posted by JPD at 12:46 PM on April 9, 2011

Don't cheat on your taxes. Do consult with an attorney or accountant who understands ISOs. There are a variety of legal opportunities for managing the tax hit.

You say the AMT will be several hundred thousand dollars; that implies the paper gain is a million+. Congratulations. As JPD notes the stock could end up being worthless. But it may well not and the amount involved is large enough you need expert advice.

One possibility you may not have considered: there is a robust and growing secondary market for privately traded stock. Shares in a company like Facebook are effectively liquid for many employee shareholders despite the company still being private. You might be able to sell some of your shares or options now, or soon after quitting. SharesPost and SecondMarket are two places to investigate the market, there may be private buyers for your company too.
posted by Nelson at 4:37 PM on April 9, 2011 [1 favorite]

If I simply don’t report the purchase... who will know?? The purchase transaction is essentially just a check from me to my company (doesn’t involve my bank or any public exchanges)

1- Writing a check involves a bank.
2- The company will have to report why it has fewer shares and more cash.

Not a good idea.
posted by gjc at 10:07 AM on April 10, 2011

Yeah nobody tells you about the AMT when they give you the stock grant. The best strategy for dealing with this is to buy early (before valuations go up) and buy often (spreading it out over as many tax years as possible). Since you didn't, you find yourself here. You need to be creative. Can you get the company to keep you on as a consultant or something so you don't start the 90day clock and then spread it out over multiple tax years? Your only other choice is to work out a payment plan. And, FYI, there is another party involved--your company's law firm who will probably be the ones who send you a stock certificate.
posted by jeffamaphone at 10:25 AM on April 10, 2011