For ESPP purchases or ISO exercises during 2010, employees should by now have received the new IRS Form 3922 for ESPPs and Form 3921 for ISOs, or a substitute form that aggregates the same information in one place. Companies must file the forms electronically with the IRS by the end of March. (Those with fewer than 250 filings were allowed to make paper submissions before the end of February.)
For those who already understand ESPP and ISO taxation, these forms add nothing new, and they don't change tax-return reporting or timing. However, employees, their CPAs, or anyone preparing a tax return must know the following about the forms:
- The IRS now knows more about ESPP purchases and ISO exercises than it used to, and its computers can quickly match inconsistencies between these forms and your tax return.
- With Form 3922 for ESPPs, for example, the IRS now knows your tax basis and the calculation of ordinary income you owe when you eventually sell the ESPP shares in a qualifying disposition. The failure to report this ordinary income on your tax return is a common error, and now the IRS will have the information to catch the mistake.
- With Form 3921 for ISOs, the IRS now has the information it needs to confirm your calculation for triggering the alternative minimum tax (AMT) when you exercise and hold the ISO stock, and it knows the tax basis at the sale of ISO shares. The ISO exercise spread is not reported on Form W-2 unless you sell the stock in a disqualifying disposition, and this new form therefore provides the IRS with information it lacked before.
Employees should not file these forms with the IRS. They should save the forms to help with their tax-return reporting after they eventually sell the shares.
myStockOptions.com has published an article and FAQ exclusively dedicated to Form 3922 for ESPPs, and another article and FAQ just on Form 3921 for ISOs. These include annotated examples of the forms that "translate" IRS jargon into understandable language and show how the information applies to tax reporting.