April 17, 2014

Reminder to Perform Annual ISO / ESPP Reporting in January 2013

As discussed in our December 16, 2010 blog article, the IRS issued final regulations in 2009 under Section 6039 of the Internal Revenue Code (the "Code") that require Employers to annually furnish each employee who exercised incentive stock options ("ISOs") or sold or otherwise transferred shares acquired under an employee stock purchase plan ("ESPP") during a year with a detailed information statement by January 31 of the following year.  In addition, Employers must file an information return with the IRS by February 28 of the following year, or by March 31 for Employers filing electronically.

Information Statements to Employees for 2012 ISO/ESPP Transactions

If in 2012 an employee exercised an ISO (i.e. a stock option described in Section 422 of the Code), the Employer must provide the employee with a written information statement by January 31, 2013.  Form 3921 should be used, however, a qualifying substitute form may also be used so long as it contains the required information. Only one transaction can be reported on a Form 3921 or in other words, an employee will receive more than one Form 3921 from his/her employer for a calendar year if the employee effected more than one ISO exercise in such year.

If in 2012 legal title to stock purchased under an ESPP (i.e. a plan described in Section 423 of the Code) was transferred from the employee to a third party for the first time, the Employer must provide the employee with a written information statement by January 31, 2013. Form 3922 or a qualifying substitute form may be used.  Only one transaction can be reported on a Form 3922 or in other words, an employee may receive more than one Form 3922 from his/her employer for a calendar year.

Information Reporting to the IRS

In addition, Employers must file an information return with the IRS by February 28, 2013, or by April 1, 2013 (since March 31, 2013 falls on a weekend) for Employers filing electronically.  Companies filing 250 or more information statements in a year (determined separately with respect to Form 3921 and Form 3922 and not aggregated between them for purposes of this 250 threshold) must file these forms electronically.  The information returns must be filed on Form 3921 for ISO transactions and Form 3922 for ESPP transfers.  In other words, unlike for the employee information statements, no substitute form can be used for the information returns filed with the IRS. 

Other Information

The forms shown on the above links to the IRS website are for informational purposes only and cannot be used for filing since the filed Forms 3921/3922 must be scannable.  Rather, Employers must order the official IRS forms from the IRS, either by calling 1-800-TAX-FORM (1-800-829-3676) or via on-line and the IRS will mail the Employers the scannable forms and other products.

The failure to timely furnish the information statements, or timely file the information returns, can result in penalties to the Employer including a fine of up to $100 for each deficient statement or return, with a respective maximum calendar year penalty of $1,500,000 for deficient statements or returns (subject to certain exceptions and subject to greater penalties for intentional noncompliance).

Keep in mind that other reporting obligations may arise upon the disposition of stock acquired under an ISO or an ESPP, including that the employee's income from the disposition of stock may need to be reported on Form W-2.

Given that there are now only two weeks left in January 2013, if they have not already done so, Employers should review their administration of any 2012 ISO and ESPP transactions in order to ensure that they will be able to timely prepare and file the requisite reports. 


This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, a solicitation, or legal advice, is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update. 

Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

About the Author


Gregory C. Schick is a partner in the Tax, Employee Benefits and Estate Planning Practice Group in the firm's San Francisco office.



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