Each year, corporations that have employees who exercise incentive stock options (ISOs) as described under Section 422(b) of the Internal Revenue Code must file a Form 3921 with the IRS for each transfer of stock to those employees. Similarly, every corporation, which in any calendar year records a transfer of the legal title of a share of stock under an employee stock purchase plan (ESPP) described under Section 423(c) of the Internal Revenue Code purchased by an employee at a discount pursuant to the exercise of the option granted under the ESPP, must, for that calendar year, file Form 3922 for each transfer made during that year. Effective for the 2024 calendar year, corporations that need to file 10 or more Forms 3921 or Forms 3922 must file them electronically before April 1, 2024, whereas in previous years, electronic filing was only required if the corporation had reporting obligations with respect to 250 or more returns.
The change in electronic filing requirements may cause some corporations to scramble to comply. In addition to ensuring that the corporation has accurate listings of employees who completed the ISO and/or ESPP exercises in the prior calendar year as well as their tax ID numbers, full names and addresses, the corporation will need to ensure that it has a transmitter control code (TCC) and an account with the IRS to file online through the IRS' Filing Information Returns Electronically (FIRE) system. For corporations filing for the first time online, a Form 4419 will need to be electronically filed as soon as possible in order to obtain a TCC from the IRS that will allow the corporation to establish a FIRE account. It may also be possible to obtain a 30-day extension from the IRS electronic filing due date by filing an IRS Form 8809 through the FIRE system (a TCC is not required to request an extension). It might also be appropriate to consider engaging a third-party service provider to prepare and submit the filings. Further information regarding electronic filing requirements for these and other forms is available in IRS Publication 1220.
For corporations new to this process, it is worth noting that the information that will need to be reported on the Form 3921 includes: (i) the date the option was granted, (ii) the date the option was exercised, (iii) the exercise price per share, (iv) the fair market value per share on the date of exercise, and (v) the number of shares transferred pursuant to exercise of the option. The information that will need to be reported on the Form 3922 includes (i) the date the option was granted, (ii) the date the option was exercised, (iii) the fair market value per share on grant date, (iv) the fair market value per share on exercise date, (v) the exercise price paid per share, (vi) the number of shares transferred, (vii) the date legal title transferred, and (viii) the exercise price per share determined as if the option was exercised on the date it was granted. Note that a corporation is not required to file a return or provide a copy to, an employee who is a non-resident alien and to whom the corporation is not required to provide a Form W-2.
A Copy B of the Form 3921 or Form 3922 must be provided to the employee no later than January 31 following the calendar year of exercise, and Copy A of the Form 3921 or Form 3922 must be filed with the IRS by February 28 (or filed electronically before April 1) following the calendar year of exercise. Copy C of each is to be retained in the corporation's records. Corporations are subject to penalties under the tax code if the Form 3921 or Form 3922 is not timely provided to the applicable employees or filed with the IRS. For example, the current penalties can be $60 per form if the filings are 30 days late (up to a maximum of $630,500 per year); $120 per form if the filings are made by August 1st (up to a maximum of $1,891,500 per year); and $310 per form for failure to file up to an annual maximum of $3,783,000. If the IRS determines that there has been an intentional disregard of the filing requirements, the penalty is $630 per form with no cap.
Corporations not previously accustomed to the electronic filing requirements for these Forms 3921 and 3922 should act swiftly to ensure compliance by the applicable due dates and avoid penalty exposure.
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