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Client Alert: Employer Reporting and Filing Obligations for ISO Exercises and ESPP Transfers

Employer Reporting and Filing Obligations for ISO Exercises and ESPP Transfers

New Requirements Apply to 2010 Transactions

Historically, Section 6039 of the Internal Revenue Code of 1986, as amended (“Section 6039”), required corporations to provide annual written statements to employees who exercised incentive stock options (ISOs) or who acquired employee stock purchase plan (ESPP) shares during the calendar year. This information was required to be provided by no later than January 31 of the year following the transaction; no specific format for the statement was required. 

In November 2009 the IRS issued final regulations relating to the Section 6039 reporting and filing requirements which updated the requirements for the information statements employers are required to provide to their employees and instituted the additional requirement to file a corresponding information return with the IRS. Due to transition relief previously issued by the IRS, this year will be the first time that employers are required to file information returns with the IRS. Prior to this year, employers were required only to provide information statements to their employees. This Alert discusses the new requirements under Section 6039 relating to the exercise of ISOs during 2010.[1]    

The IRS has recently issued forms that must be used to satisfy both the information and the reporting requirements under Section 6039 for transactions occurring in 2010 and subsequent years. New Form 3921 must be provided to the employee and filed with the IRS to report the employee’s exercise of ISOs during the calendar year. For a copy of Form 3921, see; for instructions as to use of the Form, see [2]  

The deadline for providing employees with Form 3921 for their ISO exercises made during the 2010 calendar year is January 31, 2011. The deadline for filing the forms with the IRS is February 28, 2011 if you are filing on paper (or March 31, 2011, if filing electronically – required for corporations filing 250 or more Forms 3921 for a given year). Keep in mind that a separate form is required for each transaction during the calendar year – accordingly, multiple ISO exercises during 2010 will require multiple Forms 3921 to be provided to the employee and filed with the IRS.  

The Form 3921 provided to the employee must be delivered in person or sent to the last known address of the employee who exercised the ISO. Alternatively, the notice may be sent electronically if the employee has previously consented and certain procedures specified in the regulations are followed.  

The IRS imposes penalties for noncompliance with these regulations or for Forms that are incomplete or incorrect or are not timely filed or provided to the employee. Penalties are assessed per each required form, and range from $15 per form to up to $50 per form, subject to certain annual maximum caps. The penalties are higher for noncompliance due to intentional disregard of the requirements and in such circumstances there is no cap on maximum aggregate penalties.   

If you have any questions or would like additional information, please feel free to contact the Hutchison attorney with whom you regularly work, or you may contact any of the following Hutchison attorneys:  

Amalie Tuffin -; 919.829.4293
Ken; 540.808.4782

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 
This Alert is provided for informational purposes only and is not intended to be, nor should it be construed as, legal advice on any specific matter, nor does it represent any undertaking to keep recipients advised of all relevant legal developments. This Alert does not create or constitute an invitation to create an attorney-client relationship, nor should it be construed as an advertisement or solicitation for legal services. This material may be considered Attorney Advertising in some states. Prior results do not guarantee a similar outcome.

© 2011 Hutchison Law Group



[1] Similar reporting and filing requirements exist under Section 6039 for transfers under an ESPP.  The specific Section 6039 regulations relating to ESPPs are not addressed in this Client Alert.

[2]  Form 3922 applies to the transfer of stock acquired through an ESPP.  See

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