Special Reporting Requirements Regarding Exercises of Incentive Stock Options and Transfers of Stock Acquired Under Employee Stock Purchase Plans (2016 Update)

Section 6039 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes reporting requirements on each corporation with respect to (i) the transfer by the corporation of stock upon exercise of incentive stock options (“ISOs”) and (ii) the initial transfer of stock that was previously acquired pursuant to an employee stock purchase plan (“ESPP”). Specifically, Section 6039(a) requires each corporation to file information returns relating to such exercises and transfers with the Internal Revenue Service (the “IRS”), and Section 6039(b) of the Code requires each corporation to furnish the same information to each employee exercising ISOs or making an initial transfer of stock acquired under an ESPP.

Reporting Exercises of Incentive Stock Options

The IRS has promulgated Form 3921 for the reporting of exercises of incentive stock options. Copy A of Form 3921 is filed with the IRS, Copy B is delivered to the exercising employee and Copy C is retained by the corporation for its records. Form 3921 may be reviewed online here and may be ordered from the IRS. Additionally, certain vendors may offer services relating to the creation, filing and distribution of Form 3921.

The deadline for furnishing Form 3921 to an employee (or former employee) who exercised ISOs in 2015 is February 1, 2016. Corporations required to file 250 or more copies of Form 3921 with the IRS in any calendar year must do so electronically through the IRS’s FIRE system. The deadline for electronic filing with the IRS is March 31, 2016. Corporations that elect to file Forms 3921 manually with the IRS must do so by February 29, 2016 for all exercises during the 2015 tax year.

Reporting Transfers of Stock Acquired Under an ESPP

The IRS has promulgated Form 3922 for the reporting of initial transfers by an employee (or former employee) of stock acquired by such person pursuant to the terms of an ESPP. Copy A of Form 3922 is filed with the IRS, Copy B is delivered to the transferring employee and Copy C is retained by the corporation for its records. Form 3922 may be reviewed online here and may be ordered from the IRS. Additionally, certain vendors may offer services relating to the creation, filing and distribution of Form 3922.

The deadline for furnishing Form 3922 to an employee who initially transferred in 2015 stock acquired pursuant to an ESPP is February 1, 2016. Corporations required to file 250 or more copies of Form 3922 with the IRS in any calendar year must do so electronically through the IRS’s FIRE system. (Note that the number of Forms 3921 and 3922 to be filed are considered separately for the purposes of the 250 form threshold for electronic filing). The deadline for electronic filings with the IRS is March 31, 2016. Corporations that elect to file Forms 3922 manually with the IRS must do so by February 29, 2016 for all such transfers during the 2015 tax year.

General Reporting Requirements

Forms delivered to employees (or former employees) must be delivered in person or mailed to the recipient’s last known address, or may be delivered electronically if the recipient consents to such a means of delivery. In order to satisfy the reporting requirements relating to ESPPs, the Code also requires that a corporation issuing stock under an ESPP identify the stock in a manner sufficient to enable it to carry out its reporting obligation (e.g., by use of special serial numbers or codes, which in practice are typically determined by the transfer agent).

In general, a corporation that unintentionally fails to make timely filings with the IRS is subject to penalties from $50 to $250 per form (up to a maximum of $500,000 to $3,000,000 or $175,000 to $1,000,000 for small businesses), based on the date of filing. If a corporation unintentionally fails to provide correct payee statements (e.g., Forms 3921 or 3922) to employees (or former employees) a separate penalty will apply in the same manner and amounts as the penalty for failure to timely file correct information returns described immediately above. A corporation that is required to file electronically but fails to do so without an approved waiver may also be subject to a penalty of up to $250 per return. These penalties increase (with no maximum cap) for a corporation’s intentional disregard to comply with the reporting requirements.

These reporting obligations are in addition to any reporting obligations that arise upon the disqualifying disposition of stock acquired under either an ISO or an ESPP. In particular, the IRS generally requires that the income of an employee from a disqualifying disposition be reported as “other compensation” on Form W-2 in order for the corporation to take a federal income tax deduction for the amount of income recognized by the employee upon a disqualifying disposition as well as to satisfy the corporation’s reporting obligations.

As an aside, amounts includible in income as a result of the exercise of a nonstatutory stock option (meaning a stock option that is not an ISO for purposes of Section 422 of the Code) should be reported on a Form W-2 in the case of employees or Form 1099-MISC in the case of non-employees, along with appropriate withholding. For Forms W-2 issued for the 2015 tax year, it is mandatory to report this income in Box 12 using code “V.”

More detailed instructions on filing requirements for Form 3921 and Form 3922 can be found here.