Mastering ESPP and RSU Withholding Outside the United States By Jennifer Kirk and Narendra Acharya of Baker & McKenzie
In today’s world, your company cannot afford to be noncompliant with its global stock plan withholding and reporting obligations. On a daily basis, we hear about the fiscal challenges affecting governments around the world. In addition to the cutbacks of programs and increased taxes and fees, governments remain focused on greater enforcement of existing tax obligations. In a number of countries, revenue collected from employer tax withholding (including employer and employee contributions to social taxes) is often the largest source of tax revenue–but still not sufficient. Whether through increased frequency of payroll audits, hiring more specialized teams of auditors, and/or more robust or extra reporting requirements, it is reasonable to expect that stock plan withholding practices will be facing increased scrutiny on a global basis.
As a general example, in December 2010, the UK tax authorities (HMRC) published a discussion document aptly titled “Improving the Operation of PAYE – Collecting Real-Time Information.” Not content to rely on payroll filings, which may only be made annually, and the periodic audit, HMRC in the discussion document envisions a process where it is electronically notified whenever payment is made to an employee and would confirm that the appropriate income tax and social taxes (National Insurance Contributions) have been deducted. The latest version of the discussion document no longer contains the more controversial proposal of having the compensation funds flow from the employer to HMRC (as a “central calculator” and disbursement agent) and then to the employee. Regardless of the outcome of the proposals, they are a great example of government’s focus on getting the money sooner and greater review of payroll calculations.
While a “central calculator” may not be imminent in the UK, even the current employer withholding and reporting requirements in the UK, as an example, can be challenging. First, there are additional reporting requirements beyond traditional payroll reporting that apply to equity compensation plans. This includes the annual share schemes return (Form 42) where the details of equity grants need to be specifically reported. The HMRC is then better able to cross-check the annual payroll reporting done by the UK employer to confirm that the taxable amount of equity compensation is indeed reported (and withheld upon) correctly. Second, there are timing requirements such that if the appropriate UK tax is not collected within 90 days, the employee is deemed to receive an additional benefit from the employer equal to the tax that should have been withheld, but on a grossed up basis. In short, noncompliance in the UK can be quite expensive.
During the 19th Annual NASPP Conference, the session “Mastering ESPP and RSU Withholding Outside the United States” will answer the key questions: the who, what, where, why and how of withholding for global stock plans. Don’t allow your company to be an easy target for foreign governments seeking tax revenue, as the penalties (and unwelcome scrutiny from foreign tax agencies) will be a much greater burden than ensuring that it gets done correctly in the first place.
I recently completed an analysis of how ESPPs in the western United States compare to plans nationally and I thought my readers might be interested in how the results came out. I’ll be presenting the data during my panel “Pumping Up Purchase Plans: Re-Thinking the ESPP” at the Silicon Valley NASPP Chapter All-Day Conference, but I thought I’d give you a sneak peak.
ESPP Match-Up: The West vs. the Rest The data I’m comparing is from the NASPP’s 2007 Domestic Stock Plan Design and Administration Survey (co-sponsored by Deloitte). I asked Deloitte to run a special cut of the data that just includes companies in the west and I compared that to the national data we published. While the data are several years old, I don’t think ESPP design has changed significantly. We’ll know for sure later this year, when we publish the results of our 2010 Domestic Stock Plan Administration Survey. Hopefully you participated, so you’ll have access to the results.
First, a Note About the Participants
Of the companies in the western region:
71% are high-tech companies (vs. about 46% high-tech for the national data).
74% are companies in CA and 12% are companies in WA. The remaining companies are in CO, OR, ID, NV, WY.
21% are Fortune 500 companies.
Now, For the Results
93% of respondents in the western region that offer an ESPP, offer a Section 423 plan, compared to only 77% of respondents nationally. Because the incidence of Section 423 plans is so high in the west (and non-423 plans so few), the remaining data I present here are for Section 423 plans only.
Of those western region companies that offer a Section 423 ESPP:
89% offer a 15% discount (compared to 79% nationally)
81% base their purchase price on the lower of the beginning or ending FMV (compared to 66% nationally)
22% of western region companies have a 24-month offering period (compared to 19% nationally). Six-month offering periods are also more prevalent in the west (58% of western region respondents compared to 48% nationally).
So what offering length is used more frequently nationally than in the west? A whopping 18% of respondents in the national data have a three-month offering period, compared to only 9% of respondents in the western region. I had no idea three-month offerings were so popular nationally–I actually went back and checked the data again, just to make sure. Yep, 18%. That’s almost as many respondents as offer a 24-month offering at the national level (although it’s still less than half the number of national respondents that have a six-month offering). 12-month offerings are also slightly more popular in the national data than in the western region (11% nationally vs. 8% in the western region.)
Given that ESPPs are more frequently used and more generous in the west, does that translate into higher levels of participation? You bet it does! 48% of companies in the western region report participation levels of greater than 50%, whereas, in the national data, only 29% of companies report achieving this level of participation.
Learn More at the Silicon Valley NASPP Chapter All-Day Conference
If you are thinking that you’ve heard my whole presentation, so now you don’t need to come to the chapter conference next Thursday, June 23–think again! This data represents only three slides in my panel’s presentation, so we have lots more to “re-think” about ESPPs. (Spoiler alert: We still think ESPPs are a great idea.) There will be lots of other great panels throughout the day and you can’t beat the price of admission–register by this Friday, June 17, for the early-bird rate. I hope to see you there.
Only Ten Days Left for NASPP Conference Early-Bird Rate The 19th Annual NASPP Conference early-bird rate expires next Friday, June 24. This deadline will not be extended–register for the Conference today, so you don’t miss out.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.
As the deadline for filing Forms 3921 and 3922 draws near, I have finally heard from the IRS on a nagging question (see Topic #6810 in the NASPP Discussion Forum): if a company offers an ESPP in which employees purchase another corporation’s stock–for example, a subsidiary that sponsors an ESPP in which employees purchase the parent company’s stock–which company should be listed on Form 3922?
Which Corporation Should Be Listed on Form 3922? For ISO exercises (reported on Form 3921), this matter is easily resolved because the form includes space to list both corporate entities. The corporation that transferred the stock to the employee (presumably the plan sponsor–in my example, the subsidiary) is indicated in the “Transferor” box and the corporation whose stock was transferred (in my example, the parent company) is indicated in box 6.
Form 3922, however, only has space for one corporation. §1.6039-1(b)(1)(ii) of the final regulations states that the return for the transfer of ESPP shares is required to include “The name, address and employer identification number of the corporation whose stock is being transferred.” Based on that, the company whose stock is purchased (in my example, the parent company) should be the corporation indicated on Form 3922.
Why the Confusion?
Some companies would prefer to include the plan sponsor on Form 3922, rather than the company whose stock was purchased under the plan. For example, in the case of subsidiary sponsoring an ESPP in which employees purchase stock of a foreign parent company, there is concern that including the foreign parent as the corporation on Form 3922 could cause the IRS to think that the foreign parent has employees or a permanent establishment in the United States, which could trigger other tax-related issues.
Even where the company whose stock is purchased is not a foreign company, there is concern that listing this company, instead of the actual plan sponsor, on Form 3922 could cause the IRS to think that the individuals for which Form 3922 is filed are employees of the company indicated, causing confusion with regards to other tax matters (e.g., would the IRS then be looking for a Form W-2 from this company for the individuals).
What Do the Form Instructions Say?
The instructions to Form 3922 are not as specific as the final regulations with regard to what corporation must be listed. Per the instructions, the term “corporation” could include (but is not even limited to) the corporation issuing the stock, a related corporation of the corporation, and any party in control of the payment of remuneration for employment to the employee. The box itself on the form is labeled “Corporation,” not “Transferor,” as on Form 3921. These instructions seem to allow some leeway for companies to make their own determination as to which corporate entity should be indicated on the form.
What Does the IRS Say?
Given the confusion on this matter, I contacted the IRS for guidance. Just yesterday, I received an informal response from the IRS Chief Counsel’s office that the corporation listed on Form 3922 must be the corporation whose stock was purchased/transferred. The Chief Counsel recognizes that this could cause some problems with foreign corporations, but is nevertheless sticking to what the final regs say.
What Do You Say?
I’m curious to know what our members think about this and how much of a concern it is for you. It has been suggested to me that if we approached the IRS reasonably about this, we might get some additional relief. If you send me your carefully considered and professionally presented concerns, including the reasons why you would like to have the employer corporation listed on Form 3922 instead of the corporation whose stock was purchased/transferred, I will present those comments to the IRS. You can send your comments to me at bbaksa@naspp.com.
I wouldn’t count on getting any relief by the end of March, however. So, for this year filings, I would include the corporation whose stock was transferred on Form 3922.
Register Now for Early-Bird Savings on the NASPP Conference I’m excited to announce that the 19th Annual NASPP Conference will be held in San Francisco from November 1-4, 2011. Register by May 13 to receive the special early-bird rate!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
I’ve mentioned before that you shouldn’t believe everything you read on the internet about stock compensation. This can be true even if the information comes from a source that might be expected to be reliable. Rajal Mankad of Garmin pointed out some misinformation on the Turbo Tax website about qualifying dispositions of ESPP shares.
The Turbo Tax article includes an example of a qualifying disposition in which the FMV on the purchase date ($25) is less than the FMV on the grant date ($30). The purchase price is 85% of the lesser of these two FMVs ($21.25); the FMV of the shares when they are sold is $50. According to the article, the compensation income for the qualifying disposition is $3.75 per share (the purchase date FMV of $25 less the purchase price of $21.25). But, as I’m sure my readers are aware, this is not correct. Where the purchase price is not fixed at grant, the compensation income recognized upon a qualifying disposition of ESPP shares is the lesser of:
The discount as computed based on the FMV at grant (this can be calculated by subtracting the amount in box 8 of Form 3922 from the amount in box 3–in fact, this calculation is the reason why the amount in box 8 was added to the form in the final Section 6039 regs).
The difference between the FMV at the time of sale and the price paid for the shares.
Thus, in the example in the article, the compensation income for the qualifying disposition should be $4.50 per share ($30 FMV at grant multiplied by 15%).
The Turbo Tax article also suggests that the brokerage and other transaction fees can be used to reduce amount #2 above. I don’t believe this is correct. The final ISO regs were clear that the compensation income recognized upon disposition should not be reduced by the transaction fees; while those regulations are specific to ISOs, I think they serve to illustrate the IRS’s position on transaction fees. Moreover, in the case of a qualifying disposition ESPP, amount #2 above is specifically defined as the difference between the FMV of the shares at the time of sale and the purchase price. I think it is reasonable to treat the sale price as the FMV of the shares, but I don’t think the IRS would view it as reasonable to reduce the FMV by the transaction fees for the sale. Those fees are the amount necessary to facilitate the trade; they aren’t part of the price a willing buyer would pay a willing seller for the shares (which is the definition of “FMV”).
Congratulations Are in Order Congratulations to Mike Melbinger of Winston & Strawn for being selected as one of the BTI Client Service All-Stars 2011–a considerable achievement. Catch Mike’s blog on compensation at CompensationStandards.com.
John Olson of Gibson Dunn, a frequent speaker at NASPP Conferences, is also a BTI Client Service All-Star for 2011.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Attend your local NASPP chapter meetings in Austin, Ohio, and San Diego. Robyn Shutak, the NASPP’s Education Director, will be at the San Diego meeting–be sure to say hello to her.
I understand that Forms 3921 and 3922 still are not available from the IRS, so, in today’s blog, I provide instructions for requesting an extension of the filing deadline.
Note: I was not able to personally verify the availability (or lack thereof) of the forms prior to posting this blog entry because, of course, the IRS was closed yesterday for Presidents’ Day. Here at the NASPP, we were working–just one more way in which the NASPP is better than the IRS (see NASPP Discussion Forum Topic #6788 for more proof that the NASPP provides better service than the IRS).
Time is Running Out A week or so ago, when I placed my order for one copy each of Forms 3921 and 3922, I was told that it takes five to seven days to receive the forms. Thus, at this point, it seems unlikely that the paper forms will arrive in time for the filing deadline on February 28. Any company that is planning on filing on paper should probably go ahead and file for a 30-day extension.
How to Request an Extension
You can file Form 8809 to request a 30-day extension of the filing deadline. If you file Form 8809 electronically–which is easy peasy; the IRS provides an online fill-in form for this purpose–the extension is granted automatically, no questions asked. You don’t even have to state a reason for needing the extension (I know, I know, you really want to explain that the reason you need the extension is that the IRS HASN’T MADE THE FORMS AVAILABLE). You can file for the extension online, even though you will be filing the returns on paper. So long as you submit your extension request by February 28, there are no penalties for filing for the extension.
Log in. If you don’t have a login, you can easily create one for yourself. Follow the instructions provided.
Click “Main Menu” (in the left column). This will take you to the FIRE system main menu.
Click “Extension of Time Request” (in the left column). This will take you to the Extension of Time Request page.
Select “Fill-In Extension Form.” This takes you to a short explanation of the request form.
Read the explanation. Wonder to yourself why the IRS has to be so wordy all the time. Click the Continue button. This will take you to the online extension request form.
Complete the form and click the Submit button. You should get an online confirmation that your extension has been approved. (I say “should” because I didn’t actually click the Submit button myself when I tested this. The NASPP doesn’t have any Forms 3921 and 3922 to file so it didn’t seem very smart to confuse the IRS by filing for an extension on forms we aren’t filing. I can’t imagine trying to explain that to an IRS auditor.)
Print the confirmation for your records.
Once your extension request is approved, you’ll have until March 30 to file the returns. Hopefully the forms will be available long before then. If they are not, however, you can file for another extension. That extension isn’t granted automatically and you have to give a reason for the request, but I can’t really imagine a better reason than that the IRS hasn’t yet made the forms available.
Electronic Filers Don’t Need an Extension
If you are filing Forms 3921 or 3922 electronically, you don’t need an extension because: 1) you already have until March 31 to submit the filing and 2) you don’t need the actual forms from the IRS. You are submitting an ASCII text file via the FIRE system. If you have your file ready to go, you could submit it today, even though the official forms aren’t available yet.
More Information???
We are trying to get more information from the IRS about when the forms will be available. If we find out anything, you can be sure we’ll let our members know. Follow the NASPP on Twitter or Facebook to make sure you don’t miss any announcements we make about the forms.
Update: I spoke to two IRS representatives this morning, February 22. Forms 3921 and 3922 are still not available and they did not know when they will be available. They encouraged companies to request a filing date extension (as I’ve described in this blog) or to file electronically.
Last Chance to Submit Speaking Proposals for the NASPP Conference The IRS isn’t the only one with a February 28 deadline. All speaking proposals for the 19th Annual NASPP Conference must be submitted by February 28. (And unlike the IRS, the NASPP won’t grant an automatic 30-day extension, no matter how nicely you ask–you can chalk one up for the IRS, but I still think the NASPP is better.)
If you missed the big announcement last week, the NASPP Conference will be held from November 1-4 in San Francisco. Look for information on registering for the Conference soon.
Last Chance for the Early-Bird Rate for the Online Fundamentals This is also the last week to qualify for the early-bird rate on the NASPP’s acclaimed online program, “Stock Plan Fundamentals.” This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation. It’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register by February 25 for early-bird savings.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
When the NASPP conducted our quick survey on Section 6039 back in October, there were a lot of “undecided” responses. So we conducted another survey last month. The results are in and decisions have been made.
Filing Section 6039 Returns with the IRS
Electronic filing is the clear winner here, with 78% of respondents filing the returns for ISOs electronically and a landslide 90% filing electronically for their ESPP transactions. Surprisingly, 5% of respondents are planning to file ESPP returns on paper; they must be from very small companies or have very low participation rates in their ESPP to manage this. I can’t imagine trying to file the returns on paper–my handwriting would never pass muster with the IRS and I have no idea where to scare up a typewriter these days.
In terms of getting the job done, the trend is towards outsourcing. Only 23% of respondents are preparing and filing in-house for ESPP returns; more–41%–are handling the job in-house for ISOs. When we asked this question back in October, 29% were undecided, but now that the deadline looms near, almost everyone has made a decision: only 2% remain undecided about outsourcing for ISO returns and only 5% are undecided for ESPP returns.
Participant Statements
More companies than I expected were planning on distributing copies of the actual Forms 3921 and 3922 to their employees: 32% of respondents for ISOs and 26% of respondents for ESPPs. Of course, as I’m sure all of these folks know, the IRS did not make the forms available in time for this, so these folks most likely ended up distributing substitute statements (unless they requested an extension from the IRS).
Most of the rest of the respondents distributed substitute statements that aggregated multiple transactions on one page: 58% of respondents for ISOs and 64% of respondents for ESPPs.
Back in October, 50% of respondents were on the fence about including an explanatory letter with the statements. I’m pleased to see that the majority decided to go with the more-information-rather-than-less approach: 86% of respondents ended up including an explanatory letter with ISO statements and 88% did so for ESPP statements.
Decisions went the opposite way on distributing the statements electronically. 24% of respondents were considering this back in October, but the majority (90% for ISO statements, and 87% for ESPPs) ended up distributing the statements on paper. Not surprising, given the onerous requirements for electronic distribution. It will be interesting to see how many companies move towards electronic distribution in the next few years.
More Information
For everything you need to know about Section 6039, check out the NASPP’s Section 6039 Portal.
A More Social NASPP The NASPP is networking socially: you can now follow us on Twitter or like us on Facebook. We’ll be posting announcements whenever we post new content on Naspp.com–it’s a great way to keep up with all the content we have on the website.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
As the deadline for Section 6039 returns and information statements gets closer, the activity on the NASPP Discussion Forum regarding them increases. This week, I’d like to highlight some of the issues that have been coming up for stock plan administrators and give a couple reminders.
If you don’t already peruse the Discussion Forum, submit your questions, or share your experience there, you really should check it out. It is a great place to bounce ideas off other stock plan professionals before you confirm with your own advisors.
Paper Forms
If you planning on ordering Forms 3921 and/or Forms 3922 for paper filing with the IRS, they aren’t yet available. (Thanks to Bruce Brumberg of myStockOptions.com for bringing this to my attention!) It’s my understanding that you should be able to place an order by the end of January, giving you plenty of time to complete them even with the 7-10 day processing period. Alternatively, you may choose to do an electronic filing even if your company is eligible for paper filing.
If you are planning on ordering the forms to use for employee information returns and are concerned about the timing, consider using a substitute form. We have examples available on the Section 6039 portal. To order official IRS forms or to check on the status of availability, call 1-800-TAX-FORM (1-800-829-3676).
Same-Day Sales
Unlike W-2 reporting, a disqualifying disposition of ISO shares does not impact your Section 6039 reporting. Even if the exercise is a same-day sale, you are required to report the exercise on Form 3921. (See Topic 6689.)
Multiple Transactions
If you have multiple transactions for an employee to report, you may choose to create a substitute form that consolidates all ISO exercises into one substitute Form 3921 and all ESPP transfers into one substitute Form 3922. However, you may not report multiple transactions on a paper filing of either form with the IRS. Electronic filing, of course, is not impacted by the format you choose for the employee statements. Also, if you have more than one transaction for an employee, you will need to include a unique account number for each transaction on the filing to the IRS and most likely also need to include it on any substitute form that you use for employee communications. (See Topics 6782, 6778, and 6710.)
Foreign Nationals
You will most likely need help to identify any foreign nationals for whom a Form 3921 or 3922 is required because of the complexity surrounding resident status. You do not need to file for foreign nationals who are considered nonresident aliens and who have not received a Form W-2 from the company between the grant and the ISO exercise or ESPP transfer. However, you should file a return and send an employee statement to all U.S. citizens with applicable transactions regardless of their current location. (See Topics 6790, and 6713.)
Unusual Situations
For ISOs that are treated as an NQ at the time of the exercise (e.g. more than three months after termination), you should not have a Section 6039 reporting obligation for the exercise. (See Topic 6787.)
If you have an ISO that was exercised in 2010 by the beneficiary or estate of a deceased employee, it would be safe to file Form 3921 and provide an information statement to the beneficiary or estate for the exercise. There is nothing in the Section 6039 regulations to indicate that there is an exemption for these types of transactions, a you would absolutely want to check with your advisors if you are leaning towards not filing in this situation. (See Topic 6773.)
Reminder #1: The returns are due to the IRS by February 28 (if filing on paper) or March 31 (if filing electronically). You can, however, receive an automatic 30-day extension by filing Form 8809, which can be filed electronically or on paper by the applicable deadline for filing returns.
Reminder #2: If you are filing electronically and haven’t already sent a test file, the FIRE system is accepting test filings through February 15th. IRS Publication 3609 details the electronic filing process. If you still need a TCC Number, you must apply for one 30 days prior to the filing deadline.
Today we have a fabulous installment in our Ask the Experts series of webcasts, “Tax Reporting for Stock Compensation.” I thought I’d shake things up and take a look at tax filing from the employee’s perspective.
Income and capital gains associated with equity compensation can be pretty daunting for the average employee. These are my top five reporting mistakes. Your personal top five may differ based on your company’s equity compensation program and the education you provide around taxation.
No Schedule D
Employees who do not understand capital gains at all could have this problem when it comes to reporting any sale. However, it’s much more common when there is a cashless exercise or sell-to-cover transaction, particularly if the company defines the FMV as the sale price. The employee may know that the income is reported and the associated taxes are withheld by the company, assume that the exercise (or vest) and the sale are the same transaction because they happened simultaneously and not even consider the need to report the sale. Alternatively, the employee may understand that the sale price and the FMV on the exercise or vest date is the same and assume that there is nothing to report.
Partial Sale Confusion
When an employee sells only some of the shares from an option exercise or restricted stock vest, it is surprisingly easy to misunderstand what should go on the Schedule D. This is more of a problem for employees doing a sell-to-cover transaction, but can happen even if the sale is from held shares. When referencing the exercise or vest statement, the employee reports all exercised/vested shares as being sold and/or reports the cost basis for the total shares acquired as the cost basis for the shares that were sold. The most likely result is a calculation on the Schedule D that shows a sizable capital loss on the sale. Hopefully, cost basis reporting will eventually help prevent this error.
ESPP – Qualifying Disposition
Qualifying dispositions of ESPP shares are confusing because there is still (in most cases) an income element if there was a discount at purchase. Unfortunately, the most common mistake for employees is not reporting that ordinary income when or if the company fails to do so. The income element of a qualifying disposition is the lesser of the discount as if the purchase took place at the beginning of the offering period (which should now be reported to employees on Form 3922) or the spread between the purchase and sale prices. Failure by the company to report that income doesn’t exempt the employee from reporting it.
The exception is that when the sale price is lower than the purchase price, there is no ordinary income on the qualifying disposition–and that means that employees in this unhappy situation are actually more likely to report it correctly.
Reporting Gain Twice
The most common reason for this error is a misunderstanding of restricted stock vests. The employee reports $0 as the cost basis, effectively reporting the spread at vest twice: once as income and once as capital gains. This can happen with options as well if the employee uses the exercise price as the cost basis for the shares when reporting the sale. Double reporting may also happen if an employee doesn’t realize that the income resulting from a disqualifying disposition of ISO or ESPP shares is already included in the Form W-2 (assuming your company is aware of the disposition and reports it correctly).
Failure to Report an ISO Cash Exercise
Employees with ISO grants have a host of tax concepts to familiarize themselves with, but none is quite as mysterious as the issue of AMT. AMT is such a nebulous issue for most people that it is often given only a brief explanation in equity compensation communications.
Many employees hear the words “no income” and assume that is synonymous with “no reporting obligation.” However, any exercise of ISOs (assuming the shares are held at least through the remainder of the tax year) means that the employee must complete and attach Form 6251 to their tax return, even if she or he is not subject to AMT. If the employee is subject to AMT and fails to report the exercise, this is (of course) potentially a much bigger issue than if the employee simply fails to prove she or he is not subject to AMT.
So, what’s the top five for your company? If you don’t know, start thinking about it now.
Here’s a better question: How do you figure out what mistakes your employees are making? First, anything that you don’t personally understand 100% is bound to be even more difficult for employees. Also, anything comes to you as a question is a potential for a reporting problem. Keep your ears open for horror stories–if it’s happened to one person, it could happen to your employees. Finally, if you’re really ambitious, you could survey a sample of your employees with example scenarios to see if they know how to report different transactions.
This week I explain the account number box on Forms 3921 and 3922, which will be used to file returns with the IRS for ISO and ESPP transactions. For those of us that are new to filing returns of this sort with the IRS, this box has been causing a fair amount of consternation, as the instructions for its use aren’t completely clear.
Account number isn’t mentioned under the final regulations for Section 6039, so most of us weren’t expecting this box on the forms. It is included because it is a standard box that is part of all of the forms in the 1098 and 1999 series, as well as other similar forms. I, and several practitioners that I spoke to about the forms, had a number of questions regarding what should be reported in this box and whether or not it was required, so I emailed a contact I have at the IRS. Last week, I got a response via phone and email from the IRS tax law specialist that originated the forms.
(Can I mention how unnerving it is to check your voicemail and find that someone from the IRS has left you message? Your first thought is: “Oh no! They’ve found out about the funds in that illegal tax shelter in the Cayman Islands.” Then you remember that you don’t have any funds in any illegal tax shelters anywhere in the world, much less the Cayman Islands. At this point, you aren’t sure whether you should be relieved or disappointed. But, I digress…)
What the Heck is the Account Number?
The Instructions for Forms 3921 and 3922 state: “The account number is required if you have multiple accounts for an employee for whom you are filing more than one Form 3921 [or Form 3922]. Additionally, the IRS encourages you to designate an account number for all Forms 3921 [or Form 3922] that you file. See part L in the most current version of the General Instructions for Certain Information Returns.”
This makes it sound like the account number probably isn’t applicable for our purposes, since employees aren’t likely to have more than one account in their company’s ESPP or stock option plan. This impression is incorrect–the account number is important and, in some circumstances, may be required.
What Purpose Does the Account Number Serve?
The account number serves two purposes, the most important of which is to help the IRS match any corrected forms that are submitted to the original forms that they are intended to correct. The second, less critical, purpose is to help employees match the form to other reports or records they may have of the reported transaction, and, if they are audited, to the IRS’s records. I say that this purpose is less critical because, in these circumstances, I think there are other ways that the forms and records could be matched. But, if multiple forms are submitted for an employee during a calendar year, the system that matches corrected forms to their originals relies solely on the account number.
Say that an employee purchases stock twice in one year in the company ESPP and that the purchases are the triggering event for Section 6039 purposes. The company will file two Forms 3922 for the employee with the IRS. If the company then has to file a corrected Form 3922 for one of the employee’s purchases, the only way the IRS will be able to match the corrected form to the original will be via the account number. Ditto for Form 3921 if an employee has multiple ISO exercises during a year.
The IRS system is not capable of matching the corrected and original forms based any of the other transaction-related fields (grant date, exercise date, etc.). Even if it could, if one of these fields had to be corrected there would be no way to match the two forms without a unique number identifying the transaction.
When Is an Account Number Required?
Where an employee has more than one transaction that must be reported, an account number is required and a unique number should be used for each transaction.
What Number Should be Used as the Account Number?
The account number must be unique to the transaction, not just to the employee. For our purposes, it’s really more of a transaction number than an account number. If you have a system that assigns a unique number to each option exercise or ESPP purchase, you could use that number. If you don’t, you’ll have to devise a system for assigning a unique number to each transaction. You could use employees’ ID or broker account numbers with an additional number or code appended onto the end. For example, if an employee’s ID number is 88888, you could use 8888801 for her first transaction and 8888802 for her second transaction.
The account number should not be longer than 20 digits and can contain letters, numbers and even special characters (dashes, spaces,etc.)
When is an Account Number Optional and Should I Use One Anyway?
Account number is not required if an employee has only one transaction that must be reported during a year. In this case, the IRS system can match the correct form based on the employee’s name or tax ID number and the company’s EIN.
But even in this circumstance, the IRS encourages companies to use an account number. What if the employee’s Tax ID Number is wrong on the original form and there is another employee with the same name? Then, even though every employee has only one form, the account number would still be necessary for the IRS to be able to match the corrected form to the original form. (And, let’s face it, Murphy’s Law demands that the employee whose TIN you get wrong is going to have the same name as another employee.)
Free Conference Session Audio If You Renew by Dec 31 All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!
Join Now and Get Three Months Free and Free Conference Session Audio! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. If that’s not enough, you’ll also get the audio for one NASPP Conference session for free. Tell all your friends!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify for the audio of one NASPP Conference session for free.
Rachel won’t be blogging on Thursday in light of the Thanksgiving holiday. Hopefully you will all be spending time with your families and friends and wouldn’t have been reading the blog anyway. Happy Thanksgiving!
Last week I announced that the IRS had posted the final versions of Forms 3921 and 3922 and discussed a few action items companies can take now to prepare for filing these returns. This week I discuss a few more ways in which companies can get ready.
Make New Friends
As I mentioned last week, your friends in Payroll probably won’t be much help with filing these returns, since the filing system they use for Forms W-2 is completely different. Forms 3921 and 3922 will be filed using the same procedures, and for electronic filing, the same system, that is used to file Forms 1099-MISC. Typically the Accounts Payable group is responsible for filing Forms 1099-MISC, so my guess is that these folks could be very helpful as you try to figure the process out. If you don’t know them, now would be a good time to introduce yourself. Maybe schedule a lunch date so that everyone can get to know one another.
Know the Risks (and Make Sure Your Boss Does Too)
At the recent Silicon Valley NASPP chapter meeting, Alison Wright of Baker & McKenzie pointed out that the penalties for late filings and failures to file were recently increased–news to me.
If the form is filed late by 30 days or less, the penalty is $30 per form, up to a maximum of $250,000 per year.
If the form is late by more than 30 days but is filed by August 1, the penalty is $60 per form, up to $500,000 per year.
If the form is filed after August 1 or not at all, the penalty is $100 per form, up to a maximum of $1.5 million per year!
The penalty for intentional disregard now starts at $250 per form with no maximum.
The penalties for late participant statements (or failures to distribute participant statements) are now aligned with the penalties for late or omitted returns. This means that if you fail to file or are late with both the return and the participant statement, the penalties listed above are doubled.
These penalties are a lot steeper than they used to be; it would be a good idea for everyone involved to be aware of the financial risks to the company.
Submit a Test File
You don’t want to wait until your live filing to figure out if you’ve made a mistake. The FIRE system will accept test filings until February 15, 2011–take advantage of this opportunity.
Be Ready to Request an Extension
The returns are due to the IRS by February 28 (if filing on paper) or March 31 (if filing electronically). You can, however, receive an automatic 30-day extension–no questions asked–by filing Form 8809, which can be filed electronically or on paper. The request for an extension must be filed by the applicable deadline for filing the returns (either Feb 28 or Mar 31) and you still have to distribute the participant statements on time.
As far as I can tell, there are no penalties for requesting the extension. If it gets down to the wire and you aren’t ready to go with the returns, you can always get a 30-day reprieve.
Comparing Solutions for Section 6039 Compliance Don’t miss this Thursday’s webcast on “Comparing Solutions for Section 6039 Compliance,” which will present a side-by-side comparison of the third-party solutions available for Section 6039 compliance. This is a great way to kick off your search for a vendor.
Free Conference Session Audio If You Renew by Dec 31 All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!
Join Now and Get Three Months Free and Free Conference Session Audio! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. If that’s not enough, you’ll also get the audio for one NASPP Conference session for free. Tell all your friends!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify for the audio of one NASPP Conference session for free.