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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1707
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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Pursuant to my divorce, my ex-spouse will be awarded some RSU

Resolved Question:

Pursuant to my divorce, my ex-spouse will be awarded some RSU and NQ option. I understand the IRS ruling 2004-60, where the non-employee spouse will be credited for the wages and taxes from the vesting/exercise and I will be credited the FICA and Medicare. My employer will not agree to separate my ex-spouses transaction, track and send my ex a 1099-MISC. How do I notify IRS and my ex-spouse that part of my wages and withholding are credited to them? Can I submit a 1099-MISC or is it some other document? During the separation, the IRS has a form to split the withholding to file separately. I don't know how it works once the divorce is final.
Submitted: 11 months ago.
Category: Tax
Expert:  Anne replied 11 months ago.

Anne :

Hi

Anne :

Thank you for using justanswer.

Anne :

I am going to quote from the IRS ruling 2004-60 that covers your employer's responsibilities.........

Anne :

 


Because there is no provision for the issuance of Form W-2 in the name of a nonemployee spouse, the income realized upon the exercise of the nonstatutory stock options would be reportable to the nonemployee spouse by Y on Form 1099-MISC, Miscellaneous Income, issued to the nonemployee spouse, in Box 3, Other income, with the income tax withheld reported in Box 4, Federal income tax withheld. The payments to the nonemployee spouse B from the nonqualified deferred compensation plans and the withholding thereon would also be reportable by Y on a Form 1099-MISC in Box 3, with the income tax withheld reported in Box 4.

Anne :

So you're correct that a 1099MISC must be filed.....HOWEVER, and this is the part that your employer may not know about:

Anne :

 


The income recognized by the nonemployee spouse with respect to the exercise of the nonstatutory stock options is subject to withholding under § 3402. The amounts distributed to the nonemployee spouse from the nonqualified deferred compensation plans are also subject to withholding under § 3402. The amounts to be withheld for income tax withholding are deducted from the payments to the nonemployee spouse. The supplemental wage flat rate may be used to determine the amount of income tax withholding. Pursuant to § 31, the nonemployee spouse is entitled to the credit allowable for the income tax withheld at the source on these wages.

Anne :

your employer must withhold Federal and State tax on those distributions in the name of your ex.

Anne :

You are also that you will get the FICA and Medicare withholding

Customer:

Yes, I already read this in the ruling. My employer withholds the funds in my name and has stated they will not track or withhold transactions by my ex.

Anne :

give me just a second here, ok?

Customer:

Since this is a ruling by the IRS, maybe I need to push them harder to fulfill their obligation?

Anne :

Yes

Anne :

Rev. Rul. 2002-22 concludes that a taxpayer who transfers interests in nonstatutory stock options and nonqualified deferred compensation to the taxpayer’s former spouse incident to divorce is not required to include an amount in gross income upon the transfer. The ruling also concludes that the former spouse, rather than the taxpayer, is required to include an amount in gross income when the former spouse exercises the stock options or when the deferred compensation is paid or made available to the former spouse.

Anne :

They do NOT want to be reported to the IRS for not following the rules.....and in truth, they ,may not totally understand their responsibility

Anne :

(at least, that would be my FIRST approach)

Customer:

Okay, I only asked once. I can spell out the particulars more clearly in a follow up question to my company.

Anne :

the fact that they are required to withhold Federal and State taxes even on the 1099MISC means that it MUST be in your ex's name, or else the Federal tax would be put into your account....making them non conforming

Anne :

I would print the IRS ruling and take it with me

Customer:

In the event they are not cooperative, is there a method for me to notify the IRS and my ex of the wages and withholding from the vest/exercise of the RSU and NQ options?

Anne :

yes, there are a couple of avenues

Anne :

the nicer one is probably to contact your local


Taxpayer Advocate Service

Customer:

So is there a form or do I issue the 1099-MISC or (?)?

Customer:

Taxpayer advocate service, what do they do?

Anne :

sorry be with you in a second.....looking for the form

Anne :

The taxpayer advocate is a free service that acts as a liason between you and the IRS

Anne :

they may be able to help you make your employer file the correct forms

Anne :

you ABSOLUTELY can not file the 1099

Anne :

remember, there is to be tax withheld for you ex....you have no way to do that

Anne :

IRS has not sense of humor when it comes to withholding taxes

Anne :

those are considered "treasury taxes", since they are being withheld on behalf of someone else

Anne :

not following those rules can cost your employer alot of money in fines

Anne :

and possibly even sanctions

Anne :

Treasury taxes are taken VERY seriously by the IRS

Anne :

even more so that your or my tax bill at the end of the year

Customer:

Sure. While separated, there is a table, now form 8958, that allows the income and withholding to be split between the spouses, even though all the stock wages and withholdings are in my name.

Customer:

Understood, the take it seriously. That is why I'm trying to understand the process.

Anne :

ok...stay with me.........we'll get there.......I need to backtrack a minute

Anne :

The income recognized by the nonemployee spouse with respect to the exercise of the nonstatutory stock options is subject to withholding under § 3402. The amounts distributed to the nonemployee spouse from the nonqualified deferred compensation plans are also subject to withholding under § 3402. The amounts to be withheld for income tax withholding are deducted from the payments to the nonemployee spouse. The supplemental wage flat rate may be used to determine the amount of income tax withholding. Pursuant to § 31, the nonemployee spouse is entitled to the credit allowable for the income tax withheld at the source on these wages.

Anne :

The supplemental flat rate is generally 25%

Anne :

Do you have a divorce attorney?

Customer:

Yes I do.

Anne :

Frankly, some of this should be handled by him

Anne :

Especially if your employer is being non cooperative

Anne :

Generally a phone call advising the employer that he could fact large fines if he chooses not to follow the law will do the truck

Anne :

trick

Customer:

I haven't gotten much expertise in handling of the stock in relation to taxes.

Customer:

So, I suppose I can try to communicate it more clearly to my employer and if they are still unmovable I could use my attorney to call them as well.

Anne :

Its probably not his specialty, but I wouldn't hesitate to take a copy of the IRS ruling to him so that he knows what he's facing

Customer:

I was trying not to burden them if I didn't have to. It was only their first rejection of the idea. I did pursue it after the first no. I mean, I still have to work here.

Anne :

You can also always find an Enrolled Agent, CPA, or other tax professional familiar with this ruling who may be able to help get through your employer also...........I know I've called my share over the years.........

Anne :

They've never been exactly thrilled................but sometimes its our job to make them understand the las

Anne :

law

Anne :

sorry......my typing's getting a little sloppy

Anne :

been a long day\

Anne :

see? lol

Anne :

This question will remain open even after you've paid, and you are free to ask all of the follow up questions you need ot

Anne :

to

Anne :

I'm more than willing to help you come up with a plan if your next "chat" with our employer doesn't go too well

Customer:

okay thanks

Anne :

I wish you luck....and I'd truly like to know how your come out

Customer:

This is my first question on this site. What is my next step? Just rate the answer?

Anne :

yes...............but your follow up questions are free

Anne :

I've never actually seen the customer side..........

Anne :

so I'm afraid I can only offer limited help there

Anne :

I keep thinking I should ask a question just to see what you see.;....but I never quite get around to it

Customer:

There's the chat window and a rating window and an option to save & exit. I guess I close this out with a rating and suppose I will still have an option to save the chat.

Anne :

You can bookmark and come back even after you

Anne :

you've rated

Anne :

and again, your follow up questions are free

Customer:

okay. When I started to submit a rating it says the chat window will close.

Anne :

I'm not trying to sound money hungry here.....first and foremost I want you to be happy with the service

Anne :

that's why you will want to book mark it

Anne :

if you're not ready to rate, that's ok

Customer:

I can come back with followups through book marking the question?

Anne :

I just wanted to let you know the little bit I do know from talking to customers here

Anne :

yes

Anne :

and if for any reason that doesn't work....................address your question to Anne

Anne :

give me a 24 hour lock

Anne :

and I will honor my promise to you

Anne :

(I ask for a 24 hour lock in the summer, because we do take day trips sometimes)

Anne :

and another expert wouldn't know that it was a follow up question

Customer:

Okay. And I think I read that if I rate the question more than once you will get credit more than once.

Anne :

That's true

Anne :

but like bonuses, its not a requirement

Anne :

you can always let the question run out of time.................and then it closes with no further charge to you

Customer:

Understood. Okay, thanks for your time. I will give the rating now and let you know how it progresses

Anne :

As I said, this is really all about you............and having a great experience on JA

Anne :

I would appreciate the update

Anne :

Best of luck

Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1707
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
Anne and 4 other Tax Specialists are ready to help you
Expert:  Anne replied 11 months ago.
Thank you for the excellent rating.

One of my colleagues sent me this link..........and I wanted to pass it on to you....might help
Customer: replied 11 months ago.

Thanks for the additional info, but there is no link in the reply.

Expert:  Anne replied 11 months ago.
Ok...........I'm sorry...........been out of town all weekend, must be more tired than I thought..........after I give you the link............I guess I'd better leave the lounge.........Here's the link....and my red face:


http://www.dorsey.com/files/upload/divorce_and_stock_options_2004.pdf
Customer: replied 11 months ago.

Thanks, I did find that one in my previous research.

Expert:  Anne replied 11 months ago.
You're welcome..........glad you found it

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