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.)
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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.
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As of yesterday, the final versions of Forms 3921 and 3922, as well as the associated instructions, are available from the IRS. These are the forms that will be used to file the returns required under Section 6039 for ISOs and ESPPs with the IRS. No surprises–the forms are largely unchanged from the draft versions that the NASPP obtained earlier this year. See our alert on the final forms for more information and background.
Getting Ready for Electronic Filing of 6039 Returns – Part I
Based on the last Silicon Valley NASPP Chapter meeting, I think we are starting to get to panic mode on these returns. Alison Wright of Baker & McKenzie and Jessica Carbullido of Con-way, gave a great presentation on the nuts and bolts of filing the returns, particularly on the electronic filing process.
Here are few action items that I came away with. This is only Part I; I’ll have a few more action items for you next week. For general overview of the electronic filing process, read IRS Publication 3609 (look how happy the woman on the cover is, now that she files electronically with the IRS–that could be you!)
Figure Out Your Transmitter Control Code
If you are submitting the returns electronically, you need a TCC. Chances are, your company already has one, but now would be a good time to make sure.
If you are outsourcing the filing to a vendor that is going to submit the returns to the IRS on your behalf, the vendor will likely have their own TCC, so you won’t need to worry about this (but verify this with your vendor).
If you are working with a vendor that is going to create the submission file for you but you will have to submit it (or if you are creating the file yourself), you’ll need your company’s TCC code. If your company submits Forms 1099-MISC electronically (and there’s a pretty good chance that you do), your company already has this code. You just need to find out who has it and what it is. You don’t want to request a new TCC if your company already has one–the IRS frowns on this.
If you need a TCC and you’ve determined that your company doesn’t already have one, you need to apply for one using Form 4419. Might as well get started on this now.
Set Up Your FIRE Account
Electronic filings of Forms 3921 and 3922 will be submitted to the IRS via the FIRE system. (FIRE stands for “Filing Information Returns Electronically”–those IRS folks are so clever!) This is not the same system that is used to file Forms W-2 electronically (those are filed with the Social Security Administration, not the IRS), thus, your friends in payroll and your payroll service providers aren’t going to be much help here. It is, however, the same system that is used to file Forms 1099-MISC electronically. Accounts payable, which is typically the group that files this form, may be your new BFF.
If you are submitting the electronic filing yourself, then you’ll need a FIRE account as well as a TCC. You can (and probably should) set up your own FIRE account even if someone else at your company already has one. To set up your account, go to http://www.irs.gov/efile/article/0,,id=165534,00.html and follow the instructions under “Create Your Account.” (You’ll have to wait until after 8:00 AM Eastern today to do this–until then, the FIRE system is down for maintenance. It’s been down since last Thursday; that’s a lot of maintenance!)
Find a Vendor
If you were thinking that you could just download some data to Excel and create the submission file yourself, think again. Publication 1220 includes the specifications for the submission file. And, while at 136 pages, this publication is no picnic, the kicker is that the files must be in a fixed-width ASCII format, which requires some advance programming skills to create from Excel. Why the IRS couldn’t use a nice, easy, comma-delimited file–which anyone can create using the Save As function in Excel–is a mystery.
If you haven’t already, you probably want to get started on finding a vendor that can help you create these files (either that, or start making friends with your IT department). The NASPP’s just announced webcast on November 18, “Comparing Solutions for Section 6039 Compliance,” is a great place to begin your vendor search.
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.
Don’t miss the local NASPP chapter meetings in Boston, the Carolinas, Orange County, San Diego, and Seattle. Robyn Shutak, the NASPP’s Education Director, will be attending the San Diego meeting; be sure to say hello!