United States: Upcoming Deadlines For Reporting 2023 Incentive Stock Option Exercises And ESPP Stock Transfers

Generally. Section 6039 of the Internal Revenue Code (Section 6039) requires corporations to file returns with the Internal Revenue Service (IRS) and provide information statements to employees reporting exercises of incentive stock options (ISOs) and transfers of stock purchased under employee stock purchase plans (ESPPs). These reporting obligations apply to both private and public companies and are satisfied using IRS Forms 3921 and 3922.

Form 3921 is required when a corporation issues shares to an employee who exercises an ISO. Each option exercise requires a separate Form 3921 be filed with the IRS and provided to the employee. Form 3922 is required when a corporation records the first transfer of legal title, including to a broker or other financial institution, of shares of stock purchased by an employee at a discount under an ESPP. Each of Form 3921 and Form 3922 contains three copies: Copy A is filed with the IRS; Copy B is distributed to the current (or former) employee; and Copy C is retained by the corporation. (Form 3921 also includes a Copy D, which is to be retained by the transferor of the stock where the transferor is not the corporation issuing the shares. Often, however, the corporation and transferor are the same.)

Deadlines. For ISO exercises and ESPP stock transfers that occurred during 2023:

• Copy B of each required Form 3921 and 3922 is due to the employee (or former employee) by January 31, 2024; and
• Copy A of each required Form 3921 and 3922 is due to the IRS no later than February 28, 2024, if filing by paper, and no later than April 1, 2024, if filing electronically.

Notably, regulations that were finalized in 2023 and become effective for filings made in 2024 and beyond will require more businesses to e-file Copy A of their Forms 3921 and 3922 because the regulations reduced the threshold number of information returns that would require a business to e-file from 250 to 10 or more returns. While corporations newly required to e-file their Forms 3921 and 3922 have until April 1, 2024, to make the filings with the IRS, if the corporation does not outsource the filing of Forms 3921 and 3922, it will need to ensure that it has obtained a transmitter control code, or TCC, to enable it to make the electronic filings on the IRS's Filing Information Returns Electronically (FIRE) system. Obtaining a TCC can take at least 45 days.

A 30-day automatic extension may be requested by filing IRS Form 8809 through the FIRE system (a TCC is not required for this filing) or by mail before the original filing deadline; however, the extension will only extend the due date for filing the forms with the IRS. Information statements will still be due to current and former employees by January 31, 2024.

Information Required. Forms 3921 and 3922 generally require the corporation to provide the following information:

• The name, address and employer identification number (EIN) of the corporation whose stock is being transferred and the name, address and taxpayer identification number (TIN) of the employee;
• The option grant date (offering commencement date for ESPPs);
• The option exercise date (purchase date for ESPPs);
• The exercise price per share (purchase price per share for ESPPs);
• The fair market value (FMV) per share on the exercise date (FMV per share on the purchase date for ESPPs);
• The number of shares for which the ISO was exercised (number of shares purchased under the ESPP); and
• For Form 3922 only, the FMV per share of stock on the offering commencement date, the date legal title was transferred, and the purchase price per share determined as if the shares were purchased on the offering commencement date.

Penalties. Failure to comply with the reporting obligations of Section 6039 may subject a corporation to penalties. Specifically, the IRS may impose a penalty of up to $310 per information return (capped at $3,783,000, or $1,261,000 for small businesses, per year). Penalties are reduced if the filings are made before August 1 and may not apply if the corporation can show that the failure was due to reasonable cause and not willful neglect.

Obtaining the Forms and Instructions. The IRS has provided Forms 3921 and 3922 on its website. Form 3921 is available here, and Form 3922 is available here. Note that the Form 3921 available on the IRS's website makes clear that Copy A of that form is provided for informational purposes only and cannot be used to make the filing with the IRS, because it is not scannable. The scannable version of Copy A can be obtained by ordering the official printed form from the IRS's website here. A single set of instructions for both forms is available here. The General Instructions for Certain Information Returns, available here, also provide additional instructions generally applicable to information returns, including Forms 3921 and 3922.

Action Items. Corporations should review Forms 3921 and 3922 and determine whether functions within the corporation (e.g., payroll, human resources, finance) have the information required to complete the forms or whether coordination with outside vendors will be required. In addition, to the extent a corporation does not outsource the filing of Forms 3921 and 3922 and will be newly subject to e-filing the returns, the corporation should also review IRS Publication 1220 to ensure it can satisfy the requirements and specifications for timely electronic filing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.