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Stock options in start-up company: tax implications of exercising and FMV?

I have a great deal of options in a start-up company. For reasons I won't go into here, I have an opportunity to use backpay to exercise these. All options are for non-statutory common stock and were awarded at $0.07/share (over the past couple of years). My understanding is that a FMV hasn't been done in two years. If we exercise these now and the company's position is that they are still valued at $0.07/share, there appears to be no tax liability on our part. So my question is: are we at risk if, in a year or several month's time, the IRS comes knocking on the company door and questions the FMV of $0.07? Do they then audit everyone who exercised options and come after them for taxes owed? I have no reason to suspect that the company feels the valuation has gone up or is concerned about this. However, I need to know if I am going to be owing a big chunk to Uncle Sam before I do this. For some background, no common shares have been bought nor sold by anyone in the company to date. The company has gone through several rounds of funding for preferred stock at $0.50/share. Beyond that, there is no point of reference for common share valuation beyond the FMV conducted two years ago. I really need to know where I stand with this, so any information you might have would be GREATLY appreciated. Thanks! Update: Thanks for the reply, AK. The issue isn't the company knowing how much to withhold, per se. The question was with regard to the valuation being two years old and, if the IRS came knocking down the road, would I, the now shareholder, be responsible for backtaxes if the government felt the valuation wasn't correct. IOW, I felt I had no tax implications the day I exercised the options, and this is what the company reports, but then the IRS disagrees a year later. Does the gov't then audit everyone who exercised options then? After typing this out, I think I understand now that I would be screwed if the above scenario played out. It's not like the IRS is going to give us a "pass". This crap is too complicated.

Public Comments

1. Your W-2 should have reported the amount (ie: FMV - grant price) upon exercise. It is your company's responsbility to provide this information. I am wondering how your company's payroll department handles each pay period withholding if the information is not readily available. Tyler, under Internal Revenue Code Section 409A, a company must use a reasonable valulation method. It is the company's responsibilty to prove to the IRS the method they use or reported is acceptable.Find the person who is responsible and request your company to provide a letter with the information you need (the fair market value of the stock on the date of exercise). Shift the burden of proof to your company than to second-guess yourself. The IRS will go after your company, not you, if you prove that you did what you could to report your tax return as accurate as possible.