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IRS refining the rules on Incentive Stock Options and Employee Stock Purchase Plans - Failure to File Incurs Penalties

The IRS has recently expanded its reporting requirements as they relate to incentive stock options (ISOs) and employee stock purchase plans (ESPPs). New regulations have been finalized which require companies to provide additional information to the IRS with regard to certain stock transfer transactions. There was already an existing requirement to furnish statements to individuals that exercised ISOs or were issued shares under an ESPP. These new regulations require companies to provide the IRS with similar information.

Tax Forms 

Form 3921, Exercise of an Incentive Stock Option, will include informational data regarding the employer and employee as well as the date the option was granted, exercise price, date of exercise, fair market value on the date of exercise and the number of shares that were transferred. Form 3922, Transfers of Shares Acquired Under an ESPP, will require similar informational data with regard to the transferor and transferee of the stock as well as the grant date, fair market value on the grant date, exercise price, date of exercise, fair market value on date of exercise the date the legal title of the shares was transferred and the number of shares to which legal title was transferred.

Effective Date & Due Dates 

The regulations were made effective on November 17, 2009 and apply as of January 1, 2007. While employers have been required to provide statements to individuals beginning with stock transfers that occurred in 2007, the IRS has granted a transition period with regard to the IRS reporting. Beginning with stock transfers that occur on or after January 1, 2010, forms will be required to be furnished to the IRS as well as to the individuals. These forms must be filed with the IRS and provided to the employee on or before January 31 of the year following that in which the stock transfer transpired. The instructions to the forms provide the option to obtain an automatic 30-day extension of time to file by completing Form 8809, Application for Extension of Time to File Information Returns. Penalties for failure to file these forms will be $50 per failure, up to a maximum of $250,000 per calendar year and in cases of intentional disregard could be more.

The material contained in this presentation is for general information and should not be acted upon without prior professional consultation. 

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