At the beginning of each year, Section 6039 of the U.S. Internal Revenue Code requires companies to comply with Internal Revenue Service (IRS) reporting and disclosure requirements relating to the exercise of incentive stock options (ISOs) and the transfer of stock purchased at a discount under a tax-qualified employee stock purchase plan (ESPP).

IRS Reporting Requirements

Regulations under Section 6039 require companies to file for each optionee and ESPP participant, to the extent applicable,

  • an information return with the IRS on Form 3921 to report information relating to ISOs exercised in the prior year
  • an information return with the IRS on Form 3922 to report shares purchased at a discount under an ESPP that were transferred to a third party in the prior year, including a transfer to a brokerage account or financial institution, which typically occurs immediately after the purchase of shares under an ESPP

Companies must file these forms electronically if they file 250 or more of the applicable forms in a year; otherwise they may file paper forms.

Information Statements to Optionees and ESPP Participants

The regulations also require companies to provide information statements to optionees who in the prior year exercised ISOs and to ESPP participants who in the prior year transferred stock purchased under an ESPP. The purpose of this disclosure requirement is to provide optionees and ESPP participants with the information they may need to file their individual tax returns for the year in which one of these transactions occurred. A company may satisfy the information statement requirement by providing optionees or ESPP participants with a copy of either the actual IRS Form 3921 or 3922 or, alternatively, a substitute form of statement that contains the same information as the form.

Timeline for Reporting

For the exercise of the ISO or the transfer of ESPP shares that occurred in 2020, companies must provide written information statements to participants (which may include the actual Form 3921 or 3922) not later than February 1, and they must file the Form 3921 or 3922 with the IRS not later than March 1, or, if the information returns are being filed electronically, not later than March 31. Failure to provide an information statement or file an information return will result in penalties assessed by the IRS.

Action Items

Companies should work with their outside equity compensation administrators, payroll vendors, and other service providers to determine whether the service providers will be assisting with the Section 6039 filing and disclosure requirements.