This alert serves as a reminder of certain year-end reporting requirements imposed under Section 6039 of the Internal Revenue Code of 1986, as amended, with respect to:

  • Exercises of incentive stock options (ISO) by current and former employees.
  • Transfers of shares acquired by current and former employees under a tax-based employee share ownership plan (ESPP).

For each ISO exercise and ESPP stock transfer that occurred in 2021, the company must provide a current or former employee information statement regarding that transaction by January 31, 2022, and it must file a statement information from the IRS regarding this transaction. no later than February 28, 2022 (or March 31, 2022, if filed electronically). These reporting requirements are intended to provide current and former employees with sufficient information to enable them to calculate their tax obligations.

Employee Information Statement

Any company that in 2021 issued stock upon the exercise of an ISO (i.e. a stock option described in Section 422 of the Internal Revenue Code) must , no later than January 31, 2022, provide the current or former employee who exercised the option with a written statement containing the information on Form 3921. Copy A of Form 3921 is filed with the IRS, copy B is provided to the current or former employee and copy C is retained by the company for its records.

Form 3921 is available on the Internal Revenue Service website, but a Copy A downloaded from the IRS website does not need to be filed. The official printed version of this IRS form can be scanned, but its online version, printed from the IRS website, is not. The official form can be ordered from the IRS website. Companies should also note:

  • A penalty of $280 per information return may be assessed for failing to file a correct form by the due date.
  • The penalty is reduced to $50 if corrected within 30 days (by March 30 if the due date is February 28) and is reduced to $110 if corrected before August 1, 2022, until to an aggregate annual limit of $3,426,000, or $1,142,000 for small businesses.
  • Penalties will not apply to any failure that Company can demonstrate was due to reasonable cause and not willful negligence.

Similarly, any company that in 2021 registers or has registered through its transfer agent an initial transfer by a current or former employee of shares acquired by that employee under an ESPP – i.e. a plan established under Section 423 of the Internal Revenue Code – must, no later than January 31, 2022, provide the current or former employee transferring the shares with a written statement containing the information on Form 3922 when the purchase price is either:

  • Less than 100% of the share value on the grant date.
  • Not fixed or determinable at grant date.

Form 3922 is available on the IRS website. Copy A of Form 3922 is filed with the IRS, copy B is provided to the current or former employee, and copy C is retained by the company for its records. As noted above, Copy A filed with the IRS must be scannable.

Employee Information Declaration Form

The employee information statement must be either:

  • Content on the appropriate form (i.e. Form 3921 for ISO exercises or Form 3922 for ESPP share transfers).
  • Content on a substitute form that meets the format and content requirements of publication 1179.

A separate form must be filed for each transaction and, if an employee has more than one transaction during the year, each form must contain a unique account number, such as a number provided by stock tracking software . However, if an override form is used, the business may aggregate transactions by providing a single form to each employee.

Delivery of employee information statement

Employee Information Statements, either Copy B of the applicable form or an acceptable substitute, may be mailed or delivered to the current or former employee’s last known address or may be sent electronically , provided the individual has provided consent to receive the statement electronically and the company meets certain other specified requirements.

IRS Information Return

A corporation is required to file an information return with the IRS in addition to providing employee information returns. For fiscal years and transfers in 2021, information returns must be filed no later than February 28, 2022 (or March 31, 2022, if filed electronically).

Businesses that file 250 or more copies of Form 3921 or Form 3922 in a year (determined separately and not grouped together for purposes of this 250-form threshold) must file their information returns electronically. The Taxpayer First Act of 2019, signed into law on July 1, 2019, authorized the U.S. Treasury Department and the IRS to reduce the 250 filing requirement, and proposed regulations in July 2021 reduced the 250 filing threshold to 100 by 2022 and 10 in 2023. However, the proposed regulations have yet to be finalized and the threshold remains at 250 until the final regulations are published.

Information returns must contain the same information required by the Section 6039 regulations with respect to employee information returns. Information reports for ISO exercises must be made on Form 3921, and information reports for transfers of ESPP shares must be made on Form 3922.

It is possible to file Form 8809 for an automatic 30-day extension of the due date for filing information returns. Form 8809 is available on the IRS website, and the extension will only extend the due date for filing returns with the IRS, not the due date for providing returns to recipients .

Information requirements

As described above, the information corporations must provide to a current or former employee in an information return is the same information corporations must report to the IRS in an information return. When reporting this information, companies must use the applicable form for information reporting and information reporting. As described above, copy A of the applicable form is filed with the IRS, copy B is provided to the current or former employee, and copy C is kept for company records.

Form 3921 for ISO exercises must contain:

  • The name, address and employer identification number of the company transferring the shares.
  • The name, address and tax identification number of the current or former employee to whom the shares were transferred pursuant to the exercise of ISO.
  • The date of grant, the exercise price per share, the date of exercise, the fair market value per share at the date of exercise and the number of shares transferred following the exercise of the ISO.

Form 3922 for ESPP stock transfers must contain:

  • The name, address and employer identification number of the company whose shares were transferred.
  • The name, address and tax identification number of the current or former employee who transferred the shares.
  • The date on which the purchase right was granted to the current or former employee and the fair market value per share at the date of grant.
  • The date of purchase, the fair market value per share on the date of purchase and the purchase price paid per share on the date of purchase.
  • The number of shares in which legal ownership was transferred by the current or former employee, the date on which legal ownership of the shares was first transferred by the current or former employee and , if the purchase price was not fixed or determinable on the grant date, the purchase price per share determined as if the shares had been purchased on the grant date.

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