Last updated Sept. 4, 2007
FAQs — 409A Interest Tax
1) Question: What information is needed to perform the calculation under Section 4(C)(ii)(c) - “Calculation of the Interest Tax”?
Answer: Under Section 4.C.ii.c of the Announcement, the interest tax starts to run on 4/17/06 and ends on the earlier of payment or 4/17/07. If the employer makes the payment after 4/17/07, the regular underpayment rate applies to the entire 409A tax liability and runs from 4/17/07 through the date of payment (which cannot be later than 6/30/07). Announcement 2007-18, Section 4.C.ii.b., c., and d.
The measure to apply interest rates in this calculation is determined by taking the excess of the FMV of the underlying stock on 12/31/05 over the sum of the exercise price and other amount paid for the stock, and multiplying that amount by the highest marginal rate of 35%. This amount is treated as an underpayment of taxes due on 4/17/06 and the interest rate for underpayments plus an additional 1% is applied to this measure until the Interest Tax is satisfied. Interest is compounded daily.
Interest rates to be used for this computation are available in Quarterly Announcements and the associated Revenue Rulings which are issued at the end of each calendar quarter for the succeeding calendar quarter (see irs.gov). The underpayment interest rates announced for the periods (to which an additional 1% is added) are as follows:
4/17/2006- 6/30/2006 = 7%
7/1/2006 - 3/31/07 = 8%.
See, for example, Revenue Ruling 2006-63, 2006-52 I.R.B. 1143
4/1/07 - 6/15/07 = 8% See, for example, Revenue Ruling 2007-16, 2007-13 I.R.B. 807.
For further submissions made after April 17, 2007, the overall interest factor that can be used to calculate the 409A Interest Tax is 9.195%. This rate takes into account the underpayment interest rate plus 1% compounded on a daily basis and covers the period 04/17/2006 through 04/17/2007.
2) Question: Does the Interest Tax apply for amounts which vest and are exercised in 2006?
Answer: No, the interest tax does not apply in this situation. However, the 20% tax applies.
3) Question: How do I satisfy the liability that is being paid as part of the Section 409A Compliance Resolution Program?
Answer: A check should be made payable to the United States Treasury and mailed with the further submission to the address listed in the Announcement. Electronic payments cannot be accepted.
4) Question: What beginning and ending date should be used when calculating underpayment interest, as defined in Section 4.C.ii.d. of Announcement 2007-18?
Answer: Underpayment interest is calculated from April 17, 2007 through the date the further submission (with payment) is sent to the IRS. The payment submission date will correspond to the post-mark date, or ship date if sent via parcel.
5) Question: Is the underpayment interest paid, as defined in Section 4.C.ii.d of Announcement 2007-18, required to be reported as compensation income to the employee?
Answer: No. The underpayment interest is not deemed to be compensation income to the employee. Section 4.C.iii of Announcement 2007-18 provides that the payment of the Section 409A taxes due as part of this Program constitutes additional compensation income to the employee. Section 409A taxes is comprised of the 20% tax (Section 4.C.ii.b.) and the interest tax (Section 4.C.ii.c.). It does not include underpayment interest.
IR-2007-30, IRS Offers Opportunity for Employers to Satisfy Tax Obligations of Rank-and-File Employees with ‘Backdated’ Stock Options