Tips and Updates for Forms 3921 and 3922
October 18, 2023
It will soon be time to file Forms 3921 and 3922 with the IRS and to provide copies of the forms to stock plan participants. In this blog entry, I review the filing requirements, highlight recent updates, and answer some common questions about the forms.
More questions? Check the NASPP article "Section 6039 Filings: A Complete Guide.”
Reading not your thing? Check out my 8-minute video on Form 3922.
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 the first transfer of legal title.
Here are the deadlines for forms reporting transactions that occur in 2023:
- The participant statements must be distributed to employees by January 31, 2024
- Returns filed on paper must be filed by February 28, 2024
- Returns filed electronically must be filed by April 1, 2024 (normally the deadline is March 31, but that falls on a Sunday in 2024, so you get an extra day).
New Threshold for Mandatory Electronic Filing
Effective January 1, 2024, companies that have any combination of 10 or more returns to file on any form must file all the returns electronically. To determine if a company is subject to mandatory electronic filing, companies must aggregate their returns filed on all the following forms: W-2, W-2G, 1042-S, the 1094 series, 1095-B, 1095-C, 1097-BTC, 1098, 1098-C, 1098-E, 1098-Q, 1098-T, the 1099 series, 3921, 3922, the 5498 series, and 8027.
It’s a pretty safe bet that any company that offers equity compensation has more than 10 employees, and thus, more than 10 forms W-2 to file. Which means I expect all of you will be filing forms 3921 and 3922 electronically this year.
In the unlikely event that your company is still able to file forms 3921 and 3922 on paper, you can file electronically voluntarily to take advantage of the extended deadline available to electronic filers.
As of October 30, 2023, the “General Instructions for Certain Information Returns” still says that the threshold at which mandatory electronic filing is required is 250 forms. I’m not sure why this hasn’t been updated yet, especially given that the version date is after the date the IRS announced the rule change. I assume it is going to be updated any day now. The correct filing requirement is noted in the following resources:
- Filing Information Returns Electronically (FIRE) (see “What’s New” at the top of the page)
- IRS and Treasury Issue Final Regulations on E-File for Businesses
- Electronic-Filing Requirements for Specified Returns and Other Documents (T.D. 9972)
It's easy to get an extension for filing the returns with the IRS; log into the IRS Fire system and complete Form 8809 (although, if you haven’t updated your TCC number since September 26, 2021, logging onto the FIRE system may not be so easy—see “ You May Need a New TCC to File Forms 3921 and 3922”). So long as you do this by the deadline, you get an automatic 30-day extension—no questions asked. If you aren’t able to log into the FIRE system because your TCC is outdated, you can still file Form 8809 on paper, even if you have to file your returns electronically.
It is harder to get an extension for the participant statements. You can't use Form 8809 for this; you must write a letter to the IRS explaining why you need the extension and hope that they grant it to you. See pg 18 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.
Share and dollar amounts must 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 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.
Both Form 3921 and Form 3922 have a box for an account number. Think of this as a transaction number. This box should be used to assign a unique number to every transaction reported. If you have to file a correction, this number is used to match the correction with the original filing, so it is critical that the number be unique for each transaction/form.
You can use any method you want to assign account numbers (and they don’t have to be numbers—the box can accommodate letters, spaces, and some symbols). If your recordkeeping system assigns transaction numbers, you can use that number.
Make sure employees' tax identification numbers are correct. The IRS will match the TINs against their own records to ensure the numbers are correct, but they won't get around to this until well after the filing deadline, when the correction will be subject to the maximum late filing fee. Consider using a TIN matching service before filing your returns.
Protect your employees—mask the TINs that appear on their participant statements.
ISOs and Form 3921
Answers to some common questions I get about Form 3921:
- Form 3921 is required for all exercises of ISOs, including same-day sale exercises. If you treat the sale price as the FMV, the sale price should be reported as the FMV in box 4.
- Form 3921 is not required for exercises of the portion of an ISO that exceeds the $100,000 limitation.
- Form 3921 is not required for exercises that occur more than three months after termination of employment that are taxed as NQSOs.
- The form is due for the year of exercise, not the year of settlement.
If an employee’s copy is returned because the address is incorrect, determine if a better address is available (e.g., check with HR and payroll). If you can identify a better address, you should resend the statement.
The penalties for late or omitted filings are indexed to inflation and increase annually. Here are the current penalties:
|Timing of Correct Filing||Penalty|
|Within 30 days||$60||$630,500|
|By Aug 1||$120||$1,891,500|
|After Aug 1 or never||$310||$3,783,000|
|With intentional disregard,|
regardless of timing
|Min. of $630||uncapped|
Make That a Double (Penalty)
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 $620, up to a maximum of $7,566,000. If intentional disregard is involved, that's a minimum total penalty of $1,260 (and this amount could be higher) with no annual maximum.
There are some exceptions to the penalties.
Inconsequential Errors: These are errors that do not prevent the IRS from processing the filing or correlating the filing to the payee's tax return (or otherwise using the filing as intended). Errors relating to TINs, surnames, and amounts are always consequential (except for de minimis errors—see below).
De Minimis Amounts: Errors of $100 or less for income amounts and $25 or less for tax withholding. It is not even necessary to file a correction unless the participant requests a corrected statement.
De Minimis Corrections: If the number of corrections you have to file is less than the greater of 10 returns or .5% (.005) of the total returns you filed, the corrections are not subject to a late filing fee. To rely on this exception, the original filings must have been filed on time and the correction must be filed by August 1.
Reasonable Cause: I know you aren’t supposed to have favorites when it comes to IRS penalty exceptions but we all know that everyone has their preferred exception and this one is mine. The penalties do not apply if you can demonstrate that your reporting failure was due to an event beyond your control or significant mitigating factors. You must also be able to show that you acted in a responsible manner and took steps to avoid the failure.
I think this exception is helpful in a number of circumstances that are beyond your control, such as employees who don’t respond to disqualifying disposition surveys or complete the surveys incorrectly, brokers who report trades late or report incorrect trade information, etc. I’m sure you can think of your own examples.
How Do You Apply for an Exception?
The article “5 Q&As About IRS Information Reporting Penalty Notice 972CG” by the accounting firm Crowe explains how to apply for a penalty exception.
According to the article, it can take a couple of years, but the IRS will send Notice 972CG, Notice of Proposed Civil Penalty, to inform you that one or more of your filings is subject to a penalty.
Once you receive Notice 972CG, review it to determine why the IRS is assessing a penalty. The penalty could be due to a late filing, an error (e.g., a TIN mismatch), or some other reason. I assume that the notice will be routed to your legal team and they’ll make an initial assessment as to the validity of the IRS’s claim. But if the claim relates to stock compensation, your legal team will likely ask you about it.
If you plan on paying the penalty, you don’t need to respond, you can just go ahead and set the wheels in motion to make the payment. But if you want to request an exception, you can respond to the notice to make your case. According to the Crowe article, your response should include the reason for each error, and, in the case of requests for reasonable cause relief, why you are eligible for such relief.
The article also notes that you can find detailed rules for reasonable cause relief in Treas. Reg. §301.6724-1 and IRS Publication 1586.