Companies frequently grant tax-advantaged incentive stock options (ISOs) or sponsor a tax-advantaged employee stock purchase plan (an ESPP) to provide tax-advantaged equity incentives to employees that are U.S. taxpayers. One aspect of the tax-advantaged nature of these programs is that the economic benefit transferred to employees in connection with a purchase of stock is generally not reportable as employment-based income in the year the stock is purchased, and is therefore excluded from employee Form W-2s.

Although generally excluded from Form W-2 reporting, the U.S. Internal Revenue Code requires that separate information returns be furnished to most U.S. taxpayers who exercised ISOs during 2023 (an “optionee”) or who transferred shares during 2023 that were acquired under an ESPP (a “transferor”). A copy of these information returns also must be filed with the Internal Revenue Service (IRS). These requirements generally apply with respect to any individual whose compensation the issuer of the ISO or the sponsor of the ESPP (or its parents or subsidiaries) is required to report to the IRS on a Form W-2 information return (including if the stock purchased pursuant to the ISO or under the ESPP is stock of a non-U.S. company).

The information return is a Form 3921 for ISO exercises and a Form 3922 for applicable ESPP transfers. ESPPs are generally only implemented by companies whose shares are publicly traded. This alert summarizes the rules related to furnishing and filing Forms 3921 and 3922 and the penalties associated with failure to follow these rules. We recommend that you contact your equity plan service provider or tax advisor for assistance with furnishing and filing Forms 3921 and 3922.

The deadline for furnishing Forms 3921 and 3922 to optionees and transferors is January 31, 2024. The deadline for filing Forms 3921 and 3922 with the IRS is February 28, 2024, if you physically mail the form, or April 1, 2024, if you send the form electronically. Under limited circumstances, you could be eligible for an extension that permits filing or furnishing after those dates.

The following penalties are applicable to each instance of either a failure i) to timely or correctly furnish a Form 3921 or 3922 to an employee and ii) to timely or correctly file a Form 3921 or 3922 with the IRS:

• $60 for each form that is furnished or filed late but within 30 days of its due date, up to a cap of $630,500;
• $120 for each form furnished or filed more than 30 days late but on or before August 1, 2024, up to a cap of $1,891,500; and
• $310 for each form furnished or filed later than August 1, 2024, or not furnished or filed at all, up to a cap of $3,783,000.

The penalty caps are applicable separately to failures to furnish to employees and failures to file with the IRS. Therefore, a company that furnishes and files Forms 3921 or 3922 no more than 30 days late will be subject to two separate $60 penalties per information return, and two separate caps of $630,500. The penalty caps above are reduced for companies with average annual gross receipts for the three most recent taxable years of $5 million or less. However, if you intentionally fail to furnish or file Forms 3921 and/or 3922 with the IRS, the penalty can be $630 or more per return, and it is not subject to a cap. In limited cases, a showing to the IRS of reasonable cause for failure to furnish or file could result in lesser penalties.

Please note that, beginning in 2024, employers that are required to file 10 or more Form 3921 or 10 or more Form 3922 are required to file electronically with the IRS unless they have an approved waiver. First-time electronic filers must first submit an application and establish an account on the IRS Information Returns Intake System which requires some lead time. As a result, we recommend that first-time electronic filers start well in advance of the filing deadlines.