Corporations that offer incentive stock options (ISOs) or maintain a tax-qualified employee stock purchase plan (ESPP) have an obligation to file returns with the Internal Revenue Service (IRS) and to deliver information statements to employees and former employees regarding the acquisition of shares under such arrangements. These filing obligations are intended to provide employees and former employees with sufficient information to enable them to calculate their tax obligations.  The IRS has issued two forms (and instructions): Form 3921 is used to report ISO exercises, and Form 3922 is used for ESPP share purchases. A separate form must be provided and filed for each exercise or purchase during the calendar year. So, for example, if an employee exercised multiple ISO awards during a calendar year, the employee must receive a copy of Form 3921 for each exercise, and the corporation will be required to make multiple return filings with the IRS.  The applicable form is used for both the return and information statement (filing Copy A of the applicable form with the IRS, providing Copy B to the employee or former employee, and retaining Copy C for the corporation’s records).

  •  Form 3921: Returns and Information Statements Related to ISOs. The information corporations must report on Form 3921 with respect to ISO exercises includes:
    • The name, address, and taxpayer identification number of the corporation transferring the shares (and the corporation whose shares are being transferred, if different)
    • The name, address, and taxpayer identification number of the employee or former employee to whom the shares are transferred
    • The grant date, exercise price per share, date of exercise, fair market value per share on the date of exercise, and the number of shares acquired upon exercise of the ISO
  •  Form 3922: Returns and Information Statements Related to ESPPs. The information employers must report on Form 3922 with respect to ESPP share purchases includes:
    • The name, address, and federal identification number of the corporation whose shares were purchased
    • The name, address, account number (if applicable),1 and taxpayer identification number of the employee or former employee purchasing the shares
    • The initial offering date under the ESPP for the shares, the fair market value per share on the initial offering date, the purchase price paid per share, the purchase date, the fair market value per share on the purchase date, the date the legal title to the shares was acquired by the employee or former employee, and the number of shares purchased
    • These requirements apply only to the first transfer of such shares (including if directly into a brokerage account at a broker or other financial institution). The corporation is required to identify the shares purchased under an ESPP in a manner sufficient to enable the accurate reporting of the transfer of record title of such shares.

How are the information statements delivered to employees and former employees?

Copy B of the form is provided as the information statement and may be sent electronically or by mail to the employee’s or former employee’s last known address, or it may be delivered in person. Forms may be delivered electronically only with the person’s consent and in accordance with other specified procedures.

What is the deadline?

The deadline for furnishing Copy B of Forms 3921 and 3922 to the employee or former employee for ISO exercises or ESPP shares purchased during 2021 is January 31, 2022.

The deadline for filing Copy A of Forms 3921 and 3922 with the IRS depends on whether the returns are required to be filed electronically or manually. Corporations that are filing 250 or more copies of Form 3921 or 3922 (and these forms are considered separately for purposes of determining whether the 250- form threshold has been met) must file Copy A of the forms electronically through the IRS FIRE system. The deadline for electronic filings is March 31, 2022. Corporations filing fewer forms can elect to file either manually or electronically, but manual filings must be made by February 28, 2022. An automatic 30-day extension of time to file Copy A of Forms 3921 and 3922 may be requested by completing Form 8809 no later than the due date of the return. An extension to furnish Copy B of Forms 3921 and 3922 to employees or former employees may also be requested from the IRS.

Are there penalties for noncompliance?

The Internal Revenue Code imposes a penalty of between US$50 and US$280 for each statement that is not timely and/or correctly filed (with the penalty increasing within that range depending on the degree of delay beyond the deadline), up to an aggregate annual limit of US$3,426,000. If an employer intentionally fails to provide a required statement or the correct information on the statement, the penalty is a minimum of US$570 per statement, with no maximum penalty. These penalties will apply separately for the information statement to be provided to the employee or former employee and the return to be filed with the IRS. If a corporation fails to provide both, the penalties and cap are doubled. Smaller penalties apply to “small businesses” (generally those that have average annual gross receipts of US$5 million or less for the three most recent tax years (or for the period in existence, if shorter) ending before the calendar year in which the information returns were due).

Are there any exceptions?

Yes. A filing is not required for:

  •  Non-resident aliens 
  • Anyone to whom the corporation is not required to provide a Form W-2 for any calendar year within the time period beginning with the first day of the calendar year in which the option was granted to the employee and ending on the last day of the calendar year in which the employee exercised the option or purchased the shares

Further, penalties will not apply to any failure that the corporation can show was due to reasonable cause and not willful neglect.  To read more click here.

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