As stock plan professionals are by now all too aware, the new IRC Section 6039 reporting rules for companies have become effective, starting with transactions in 2010 that will be reported in January 2011. The rules apply to employee exercises of incentive stock options and purchases in employee stock purchase plans. In addition to providing an information statement to the employee, companies must now file information returns with the IRS: Form 3921 for ISOs and Form 3922 for ESPPs. (See also the instructions for both forms.) The statements for transactions in any given year must be provided by January 31 of the following year, though companies may request an extension of up to 30 days. For details about the new rules, including the information that must appear on the forms, see the related FAQ on myStockOptions.com.
While technically only one transaction per form can be reported to the IRS, companies are allowed to distribute a substitute form to each employee that lists all the transactions which occurred during the year (this aggregate statement is subject to the requirements in IRS Publication 1179). This information will be useful when employees complete Schedule D of the Form 1040 tax return for the year in which they eventually sell the shares (see the Tax Center on myStockOptions.com for examples of Schedule D). However, the form does not directly track all the information employees will need to complete Schedule D, particularly for the tax basis, and they will also need Form 1099-B from their broker for sales information.
It is important for employees to know that the IRS will now have information about ISO exercises or ESPP purchases which it previously did not receive. For example, the IRS will now know about the spread at ISO exercise, which is part of the alternative minimum tax (AMT) calculation.
For the IRS filing, companies issuing more than 250 of either information statement must file electronically through the FIRE system at IRS.gov. The instructions for filing electronically can be found in IRS Publication 1220 and IRS Publication 3609. Companies with fewer than 250 issuances of either Form 3921 or 3922 are allowed to make a paper filing with the IRS, though any company may file electronically, even if not required. Paper returns must be filed with the IRS by February 28, and electronic filings must be submitted by March 31. Failure to provide the required statements results in penalties under Section 6722. The basic penalty structure is $50 for each employee statement that is not issued, is issued late, or is issued with incorrect information, with a $100,000 annual limit. If a company makes a mistake in a form, it can correct this by refiling.
The law firm Baker & McKenzie has prepared a helpful legal alert with a useful collection of FAQs on some of the technical and unresolved issues of Section 6039 reporting.