Final Regs Expand ISO, ESPP Reporting Requirements

IRC § 6039 requires corporations to furnish a written statement containing certain information to an employee who exercises incentive stock options (ISOs) or who receives stock under an employee stock purchase plan (ESPP). In 2006, Congress expanded these reporting obligations by requiring that corporations also furnish information to the IRS. In November 2009, the IRS issued final regulations to reflect the additional reporting requirements (TD 9470).

The new reporting requirements go into effect for stock transfers that occur during 2010. Thus, it is important that corporations prepare now to collect the information that they must report. Presumably, employers have already been collecting the information to fulfill the reporting requirements to employees. However, corporations should recognize that the new final regulations modify the reporting requirements somewhat from prior regulations that the IRS issued in 2004 (TD 9144). In addition, now that corporations must report information to the IRS, it is even more important that they make efforts to collect and report the information fully and accurately.

The IRS has indicated that it is developing two new forms that taxpayers will use to fulfill the reporting requirements: Form 3921, Exercise of an Incentive Stock Option Under Section 422(b), and Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c).

For stock transfers that occur during 2010, the returns are due on Jan. 31, 2011. Fortunately, corporations use the same form to fulfill the requirement to furnish information to employees and to the IRS.

The reporting obligation arises for ISOs when an employee exercises an ISO. The reporting obligation for ESPPs arises when an employee first transfers stock acquired through the ESPP to another party. This includes a transfer of the stock to an account maintained for the employee by a broker or financial institution. Reporting is required for an ESPP only where the exercise price is less than 100% of the value of the stock on the date of the grant, or where the exercise price is not fixed or determinable on the date of the grant.

The final regulations list the information that forms 3921 and 3922 will require. For ISOs, corporations will find that the list is almost identical to the list provided in the 2004 final regulations, except that corporations must report the exercise price per share. For ESPPs, corporations will find that the list in the new regulations is a significant expansion of the list provided in the old regulations. The IRS expanded the list to provide sufficient information to employees to enable them to calculate their tax obligations.

Corporations should evaluate whether their information systems accurately capture all the information that they must report to employees and the IRS under the new regulations. Corporations that begin this evaluation process now should be able revise their systems, as needed, in plenty of time to meet the Jan. 31, 2011, reporting deadline.

For a detailed discussion of the issues in this area, see “Employers Face New IRS Reporting Requirements for ISOs and ESPPs,” by G. Edgar Adkins Jr., CPA, and Jeffrey A. Martin, CPA, in the February 2010 issue of The Tax Adviser.

—Alistair M. Nevius, editor-in-chief

The Tax Adviser

Also look for articles on the following subjects in the February 2010 issue of The Tax Adviser:

• A practitioner’s guide to telecommuting.
• An update on partnership issues.
• A discussion of the mark-to-market election.
• A look at the inclusion of trusts in a decedent’s gross estate.

The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail taxsection@aicpa.org for a subscription to the magazine or to become a member of the Tax Section.