Internal Revenue Service officials announced an initiative aimed at providing relief for rank-and-file employees affected by their companies’ issuance of backdated stock options.The program is designed for employees who may be unaware that they held backdated options -- not for corporate executives or other insiders who exercised backdated options.

According to reports, the IRS and other federal regulators -- including the Securities and Exchange Commission and the Federal Bureau of Investigation -- are continuing to investigate more than 100 companies to determine if they have manipulated the grant dates and exercise prices of options to boost the value to the corporate executive recipients. The SEC has already brought charges in a handful of cases.

According to the IRS, if an employee exercised a backdated option in 2006, they may owe an additional 20-percent tax, plus an interest tax, under federal laws governing deferred compensation. the IRS says that, if the option had been properly priced, the employee would only have owed income tax on the difference between the value at the date of grant and exercise.
Under the IRS initiative, described in Announcement 2007-18, companies can come forward and pay the additional 20-percent tax and any interest tax that employees owe.

The initiative will, of course, also accomplish the task of smoking out companies that may have engaged in backdating -- the IRS warns in its announcement that affected employees who have not taken corrective action on their own will remain liable for the additional tax if their employers do not participate in the program, or fail to abide fully by its terms.

Corporations that elect to participate will be required to provide the specific details about the options, including specifics on the tax calculation. Employers must notify the IRS of their intent to participate by Feb. 28. The taxes companies pay to relieve employee tax bills will be treated as additional 2007 compensation income.

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