I thought I was going to be blogging about the government shutdown today but since it’s business as usual in DC as of last night, I’m off the hook on that topic, at least for a few weeks. Instead, I have a few Section 6039 reminders for you, seeing that the participant statement deadline is fast approaching.
Let’s Review
As you know, under Section 6039, companies are required to file returns with the IRS and issue participant statements for transactions under ISOs and ESPPs. For ISOs, the reporting obligation is triggered upon exercise and is fulfilled using Form 3921. For ESPPs, the reporting obligation is triggered by the first transfer of legal title of the shares and is fulfilled using Form 3922. If the shares acquired under an ESPP are deposited into an account at the company’s designated broker, the purchase is considered to be the first transfer of legal title.
Deadlines
Here are the deadlines for this year:
Information statements must be distributed to employees by January 31
Returns filed on paper must be filed by February 28
Returns filed electronically must be filed by April 2 (because March 31 is a Saturday)
Paper or Electronic?
You must file electronically if you have more than 250 returns to file and anyone can file electronically voluntarily to take advantage of the extended deadline available to electronic filers. If you have more than five returns to file, I recommend going electronic; there are solutions that are priced reasonably for companies with only a handful of returns to file (email me if you need a list).
Check Your TINs
Make sure employees’ tax identification numbers are correct. The IRS is for sure going to check them but they won’t get around to it until well after the filing deadline, when the correction will be subject to the maximum late filing fee. Consider using an TIN matching service before filing your returns. (Thanks to My Equity Comp for this tip!)
What’s Up with Form 3921?
Kim Diemer of Take Stock brought to my attention that, although the IRS updated Form 3921 this year, the new paper version of the form is not yet available from the IRS. If you file electronically, this doesn’t effect you, as the information in the form and the specifications for the electronic file haven’t changed. The only change was to make copies B, C, and D fill-in forms in the PDF.
If you file on paper, the delay in availability of the forms could be a problem. The thing about filing on paper is that you can’t just print the forms from the IRS website, fill them in, and then drop them in the mail. You have to order the official paper forms from the IRS. Failure to receive the forms from the IRS does not relieve you of the obligation to file the returns by February 28.
At the moment, you’ve still got some time on this. You don’t need the official paper forms for the participant statements that are due by January 31; you can just download the form from the IRS website, fill out the appropriate copies, and distribute them to the appropriate parties. Or you can create a substitute statements (see the NASPP article “Figuring out Section 6039 Filings” for more information on this).
If February 28 nears and you still haven’t received the forms from the IRS, you can use Form 8809 to request a 30-day extension. If Form 8809 is submitted electronically (via the IRS FIRE system), the extension is automatic (handy if the government is shut down when you submit your request). You can request the extension electronically even if you are filing the forms on paper.
Alternatively, you could file the forms electronically (see note above about affordable solutions). Note that if the government does shut down after February 8 (the date the government is currently funded through), this may affect the IRS’s ability to provide the new forms. The IRS isn’t expected to extend the filing deadline in the event of a shutdown, so keep an eye on this and if a shutdown happens, be prepared with a backup plan.
More Information
Check out the following articles for more info on Section 6039 filings:
Here we are again at the start of another season of Section 6039 filings. Nothing much has changed with respect to Section 6039 filings in recent years, so imagine my surprise when I learned that the IRS had updated Form 3922.
Form 3922 Grows Up
As it turns out, the only update to the form is that it has been turned into a fill-in form. If you are planning on submitting paper filings, this allows the form to be filled in using Adobe Acrobat, so you don’t have to scare up a typewriter or practice your handwriting. I haven’t owned a typewriter since college and even I can’t read my handwriting, so I am a big fan of fill-in forms.
Unfortunately, this is just about the least helpful improvement to the forms that the IRS could make. Form 3922 is for ESPP transactions. ESPPs tend to be offered by publicly held companies with well over 250 employees. Chance are, if a company has to file Form 3922, the company has more than 250 returns to file (less than 250 ESPP participants is probably a pretty dismal participation rate for most ESPP sponsors) and the returns have to be filed electronically. The fill-in feature doesn’t impact the electronic filing procedures; it is only helpful for paper filings.
It would have been more helpful if the IRS had made Form 3921 a fill-in form. Given the declining interest in ISOs (only around 10% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey grant ISOs), companies are more likely to be filing this form on paper. The IRS notes, however, that it selected Form 3922 to be made into a fill-in form because they receive so few filings of it on paper. I guess the IRS’s goal was to appear helpful but not actually be helpful. Your tax dollars at work.
A Fill-In Form Isn’t As Helpful As You Think, Anyway
As it turns out, having a fill-in form may not be that helpful, anyway. I was thinking you could fill in the form, save it, and then email it to the IRS but it doesn’t seem like this is the case. No, even if you fill it in using Adobe Acrobat, you still have to print it out and mail it to the IRS. And the requirements for printing the form out still include phrases like “optical character recognition A font,” “non-reflective carbon-based ink,” and “principally bleached chemical wood pulp.” I think this means that you have to print the form on white paper, using black ink that isn’t too shiny, and using the standard fonts in the fill-in form. But I’m not entirely sure.
What About Form 3921?
When I first saw that Form 3922 is now fill-in-able, I assumed, perhaps naively, that a fill-in Form 3921, which would truly be useful, would be available any day. But that was back in September and still no update to Form 3921. Upon reflection, especially given the IRS’s statement about why this honor was bestowed upon Form 3922, I think I may have been overly optimistic.
A riddle: what do the Trade Adjustment Assistance Program, the African Growth and Opportunity Act, and HOPE for Haiti have to do with Forms 3921 and 3922? You might think “not much” but then you aren’t a member of Congress. The Trade Preferences Extension Act, which includes provisions relating to those three things and a couple of other global trade-related items, also increases the penalties for failure to file Forms W-2 and forms in the 1099 series, which includes Forms 3921 and 3922 (why forms 3921 and 3922 are considered part of the “1099” series is another riddle for another day).
The New Penalties
Timing of Correct Filing
New Penalty (Per Failure)
New Annual Cap
Old Penalty (Per Failure)
Old Annual Cap
Within 30 days
$50
$500,000
$30
$250,000
By Aug 1
$100
$1,500,000
$60
$500,000
After Aug 1 or never
$250
$3,000,000
$100
$1,500,000
With intentional disregard,
regardless of timing
Min. of $500
uncapped
Min. of $250
uncapped
Make That a Double
The penalties apply separately for returns filed with the IRS and the statements furnished to employees. If a company fails to do both, both the per-failure penalty and the cap is doubled. Thus, if both the return and the employee statement are corrected/filed/furnished after Aug 1, that’s a total penalty of $500, up to a maximum of $6,000,000. If intentional disregard is involved, that’s a minimum total penalty of $1,000 (and this amount could be higher) with no annual maximum.
Effective Date
The new penalties will be effective for returns and statements required after December 31, 2015, so these penalties will be in effect for 2015 forms that are filed/furnished early next year.
Penalties At Least As Interesting As the Trade Provisions?
Interestingly, when I Googled “Trade Preferences Extension Act,” so I could figure out what the rest of the act was about, the first page of search results included as many articles about the new penalties as about the trade-related provisions of the act.
If you want to know what the rest of the act is about, here is a summary from the White House Blog. There’s not a lot more to say about the penalties but if you want to spend some time reading about them anyway, here are summaries from Groom Law Group and PwC.
To start off the new year, I have a few reminders for Section 6039 filings for ISO and ESPP transactions.
Deadlines
Participant statements need to be furnished by February 2, 2015 (normally the deadline is January 31, but that’s a Saturday). Paper returns need to be filed with the IRS by March 2 (February 28, the normal deadline, is a Saturday) and electronic returns need to be filed by March 31 (this deadline applies regardless of whether electronic filing is on a mandatory or voluntary basis).
Extensions
It’s easy to get an extension for filing the returns with the IRS; log into the IRS Fire system and complete Form 8809. So long as you do this by the deadline, you get an automatic 30-day extension—no questions asked. It is harder to get an extension for the participant statements. You can’t use Form 8809 for this; you have to write a polite letter to the IRS explaining why you need the extension and hope that they grant it to you. See pg 13 of the “General Instructions for Certain Information Returns” for details of what you need to say in the letter and where to send it. The extension is not automatic, so you’d best get on this right away if you think you’ll need one.
Substitute Participant Statements
You can create a substitute statement for participants that lists all their transactions on one page, rather than a separate form for each transaction. You still have to use the IRS terminology, but you can include your own statement that explains what all the words mean (or even annotate the statement itself). But you can’t include any slogans or taglines on the form and if you are going to include your company logo, you have to comply with specific guidelines explained in IRS Publication 1179 (see pg 6). The IRS is serious about this—they are worried your logo might make the form look like junk mail—so it might be best to skip the logo.
Rounding
Shares and dollar amounts have to be rounded in electronic filings (to the nearest whole share or penny, respectively). The IRS says to use a true round for share amounts (that’s rounding down for .4 and under, up for .5 and above). They don’t specify how dollar values should be rounded but since they recommend a true round for share amounts, it’s probably reasonable to use the same approach for dollar values (that’s also how dollar values are rounded on other tax forms (e.g., tax returns). But other approaches might be reasonable as well; I’m fairly certain the IRS isn’t that concerned about how you round. Just be consistent.
Employee ID Number
This needs to be the employee’s tax ID number. Also, you can’t truncate it or mask it on the participant statements. The IRS eventually checks to make sure the number is correct and you’ll have to pay a fine if it is wrong. But they won’t get around to checking until you are in the maximum penalty period. So be smart and run a TIN matching program on your returns before you file them with the IRS.
Account Number
For our purposes, think of this as a transaction number. You can use any system you want to come up with the number (and it can include letters as well as numbers), but you need to assign a unique number to every transaction reported. If you later have to file a correction, this number is how you will identify the transaction being corrected.
Names
Don’t include any special characters in employee names other than hyphens and ampersands.
Just a Few Filings?
Even though you only have a handful of filings, you cannot download the form from the IRS website and fill it out or gin up a form that looks similar in Word and use that to file your returns. The IRS has all sorts of fussy requirements for returns filed on paper, including that they be printed on special paper with special ink. If you don’t want to pay a third party to help with this, you have to order the paper forms from the IRS and wait for them to send them to you. Then you need to scare up a typewriter or print very very neatly. There are tools that are quite affordable that can be used to file even just a handful of forms—personally, I think this approach would be easier than finding a typewriter. Email me and I can send you a list.