United States: Annual ISO And ESPP Information And Reporting Requirements

Annual Information Statements and IRS Returns

Requirement to Report

For any exercise of an incentive stock option (ISO) or transfer of a share previously purchased pursuant to a tax-qualified employee stock purchase plan (ESPP) where the purchase price paid for the share was (a) less than 100% of the fair market value on the date of grant or (b) not fixed or determinable on the date of grant, the Internal Revenue Code requires companies to:

  • furnish, by January 31, 2014, annual information statements to the participant who exercised the ISO or transferred the ESPP share; and
  • file, by February 28, 2014 (for paper filers) or by March 31, 2014 (for electronic filers), an information return with the IRS (please note that companies may request an automatic 30-day extension of this deadline by filing a Form 8809, Application for Automatic Extension of Time to File Information Returns, with the IRS on or before the applicable filing deadline).  

With respect to reporting ESPP transactions, companies are required to report the first transfer of legal title to any share purchased under an ESPP plan. When a participant's shares are put into a brokerage account on behalf of such participant, the transaction is considered a transfer of legal title and, if it is the first transfer of legal title of the shares, it must be reported to the IRS and to the participant. If instead a participant's shares are issued directly to the participant or registered in the participant's name on the company's records, the transaction does not need to be reported to the IRS or to the participant because such transaction is not considered a transfer of legal title.

Participant information statements may either be delivered or mailed to the participant's last known address or, if the participant has given his or her consent to receive the statement electronically, provided in electronic format. The consent to receive the statement electronically must be made in a way that demonstrates that the participant can access the statement in the electronic format in which the statement will be provided. For example, if the statement will be sent as a Word attachment to an e-mail message, the consent also must be sent as a Word attachment to an e-mail message. Further, the participant must be provided with certain disclosures related to the consent, including the right to receive a paper copy and the manner in which consent may be withdrawn.

Format of Statement/Return

Returns for ISO and ESPP transactions must be submitted to the IRS on Form 3921 (for ISOs) and Form 3922 (for ESPPs).  You may order Form 3921 and/or 3922 by calling the IRS at 1-800-829-3676 or through the IRS website (please note that, even though Forms 3921 and 3922 may be found on the IRS website, you are not permitted to print and file these forms with the IRS; the IRS will only accept the official forms ordered from the IRS).   

Participant statements may be provided on Form 3921 (for ISOs) and Form 3922 (for ESPPs) or may be provided using a different format that complies with the substitute form requirements found in IRS Publication 1179.  At a minimum, substitute forms will need to contain all of the same information as the actual Form 3921 and 3922.

We expect that companies with a limited number of transactions will likely use Forms 3921 and/or 3922 (as opposed to substitute statements) since these forms will need to be prepared and submitted to the IRS in any event.  Further, we expect that companies that provide Form 3921 and/or 3922 to participants (again, as opposed to providing substitute statements) will deliver the form(s) to their participants, along with a cover letter explaining the statement in a manner similar to this statement for ISO transactions and this statement  for ESPP transactions.  

The IRS requires that a separate Form 3921 or Form 3922 as applicable be filed with the IRS for each transaction (i.e., each ISO exercise), even if one participant has multiple transactions during the course of the year.  If a company provides participants with an information statement that meets the substitute statement requirements, the IRS has indicated that the company may aggregate transactions and provide only one substitute statement to each participant who had multiple transactions during the year.

Whether you use Forms 3921 and/or 3922, or you use substitute forms, certain information must be included in the form, including for ESPP transactions, the price per share of ESPP stock transfers. If the exercise price is not fixed or determinable on the date of grant (e.g., the exercise price is the lesser of 85% of the fair market value on the first day of an offering period or 85% of the fair market value on the last day of an offering period), you must report the exercise price as if the purchase occurred on the grant date (i.e., the first day of the offering period).  In addition, if any individual participant has more than one ISO transaction or more than one ESPP transaction in a calendar year, you must include a unique account number on the form.  The IRS has indicated that this number may be any number, not longer than 20 digits, and can contain numbers, letters and special characters.  The unique number assigned to exercises/purchases by some stock plan administration programs could be used for this purpose.  Otherwise, you should create a system to assign numbers to each transaction.  Finally, even though you are only required to assign unique account numbers if a participant has more than one ISO or ESPP transaction in a year, we recommend that you assign a number to every ISO and ESPP transaction, as we expect that this will be used by the IRS to track/locate transactions and will likely be easier to ensure compliance if it is done consistently for all transactions.

Electronic Submission of IRS Returns

Companies that are required to file 250 or more ISO returns or 250 or more ESPP returns to the IRS must file the ISO or ESPP returns, as applicable, electronically through the IRS' Filing Information Returns Electronically (FIRE) system.  To submit through the FIRE system, you will need to set up a FIRE account through the IRS website and you will need a Transmitter Control Code (TCC). If you are using a stock plan administration firm that will be submitting these returns on the company's behalf, they will likely use their TCC.  If you are not filing through a stock plan administration firm and/or do not have a TCC, you will have to submit a Form 4419, Application for Filing Information Returns Electronically, so that a TCC can be assigned to the company. Form 4419 must be submitted to the IRS at least 30 days prior to filing a return electronically, and thus, must be submitted no later than March 1, 2014 (or March 31, 2014 if an extension is obtained) in order to timely file Forms 3921 or 3922 electronically. Also, to submit returns through FIRE, you will need to create a submission file that meets the FIRE requirements. These formatting requirements for FIRE are somewhat onerous and, as a result, companies will likely need assistance in creating the submission file due to the formatting requirements (a number of stock plan administration firms are equipped to provide this assistance).  In addition, while you are permitted to voluntarily file electronically, because the process is challenging and potentially involves some cost to prepare the necessary file, most companies with limited transactions will find it more practical to prepare and file paper returns.


The Internal Revenue Code imposes up to a US$100 penalty for each statement not furnished, or for each statement furnished to a participant with incomplete or incorrect information, up to a maximum penalty of US$1,500,000 per year. In addition, the Internal Revenue Code imposes up to a US$100 penalty for each return not filed with the IRS, or for each return filed with the IRS with incomplete or incorrect information, up to a maximum penalty of US$1,500,000 per year. Greater penalties will apply if a company intentionally fails to provide a statement or file a return with the IRS.


Please contact any member of Orrick's Compensation and Benefits Group for further assistance on meeting these information statement and return requirements.  If you use an external stock plan administrator, your stock plan administrator may also be of assistance as many stock plan administrators have developed specific services to help companies comply with these requirements.   

Additional Annual Reporting Requirements

Disqualifying Disposition of ISO Shares

A company must report any ordinary income that an optionee recognizes in connection with a disqualifying disposition of ISO shares during the 2013 calendar year in box 1 of the optionee's 2013 Form W-2. Failure to report this income will prevent a company from taking a deduction for the ordinary income that results from the disqualifying disposition and may subject the company to certain reporting penalties.

A sale of ISO shares before the later of the date which is two years after the date of grant and the date that is one year after the date of exercise is treated as a disqualifying disposition. The ordinary income recognized on a disqualifying disposition is equal to the difference between the ISO exercise price and the lesser of the fair market value of the shares on the date of exercise or the sale price of the shares.

Disposition of ESPP Stock

If any person transferred ESPP stock for the first time during the 2013 calendar year, a company must report in box 1 of the person's 2013 Form W-2 the amount of the purchase price discount (described below), if any, on ESPP stock and, if the ESPP stock was transferred in a disqualifying disposition, any ordinary income that the person recognized when the shares were transferred. The "purchase price discount" is the difference between the fair market value of the shares on the first day of the offering period and the purchase price that would result if the shares were actually purchased on the first day of the offering period. For example, if the purchase price of the ESPP stock is equal to the lesser of 85% of the fair market value on the first day of the offering period and 85% of the fair market value on the last day of the offering period (the purchase date), the purchase price discount is 15% of the fair market value on the first day of the offering period. Failure to report this income will prevent a company from taking a deduction for the ordinary income and may subject the company to certain reporting penalties.

A transfer of ESPP stock before the later of the date which is two years after the first day of the offering period or the date which is one year after the purchase date is treated as a disqualifying disposition. The ordinary income recognized on a disqualifying disposition is equal to the difference between the purchase price and the fair market value of the shares on the purchase date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.