Employers face new IRS reporting requirements for ISOs and ESPPs.

• Author: Fairbanks, Greg A.
• Position: Initial public offerings, employee stock purchase plans

Sec. 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 (Tax Relief and Health Care Act of 2006, P.L. 109-432). In July 2008, the IRS issued proposed regulations to reflect the additional reporting requirements (REG-103146-08). In November 2009, the IRS issued final regulations (T.D. 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 in order 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 (T.D. 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.

At the time it issued the final regulations, the IRS indicated that it was in the process of 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 January 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 grant or where the exercise price is not fixed or determinable on the date of the grant.

For ISOs, the final regulations indicate that Form 3921 will require the following information:

* Name, address, and employer...