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Changes to Section 6039 were thought about in an attempt to increase compliance and make the reporting process easier for participants. These changes were made effective for transactions occurring in calendar year 2010 and later, so if you have not already, now might be a good time to start planning how you will deal with these changes. Here's what you need to know to proceed and how to ensure your procedures are in compliance.
What is Section 6039
Historically, IRC Section 6039 required companies granting ISOs or offering qualified ESPPs to send annual statements to participants who a) exercised an ISO or b) first transferred ESPP shares through a disposition or re-registration during the calendar year. The purpose of this reporting was to provide the necessary data for participants to accurately calculate and report income and tax obligations related to dispositions for qualified equity plans. These statements were issued by January 31 the following year and typically followed a basic, flexible format. Despite the penalties for non-compliance, many firms took a reliably relaxed approach to this requirement, using exercise or purchase confirmations or year-end tax statements to satisficate the participant reporting obligation.
What Changes Were Made in 2010?
The new 6039 rules are intended to make the reporting process easier for participants and to reduce non-compliance. For tax year 2010, companies are required to report the same transaction data to the IRS, and the data elements required to be reported have changed, particularly on the ESPP side. The IRS has issued Forms 3921 (ISOs) and 3922 (ESPPs) as guidelines for participant reporting; companies may elect to use these formats, or a "substitute format" that aggregates multiple transactions into a single report to make the participant notification more user friendly.
IRS filing must be done electronically if the total number of unique forms exemptions 250, although the IRS recommends e-filing regardless of your total number. There is no change to the participant reporting deadline of January 31; e-filing must occur by March 31, similar to Form W-2 reporting for the IRS. Penaltyies for non-compliance can start at up to $ 250,000 / year for late or non-reported transactions and there is no maximum amount for intentional disregard.
What You Should Do
If you have not already, start learning and planning now.
• Familiarize yourself with the new rules and understand the requirements. Also, it's important to understand what events trigger this reporting. Read Publication 1220 for filing requirements and check out the draft versions of Form 3921 and Form 3922 (look out for final versions coming soon). Talk to your outside counsel regarding 6039 reporting obligations in special cases, such as mergers / acquisitions, and treatment for non – US employees.
• Understand your choices and budget for administration. Discuss your options with internal and external partners.
• Determine if your company plans to issue the formats of Forms 3921 and 3922 prepared by the IRS, or a substitute statement. If you decide to use a substitute format, make sure it complies with the requirements specified by the IRS. Decide whether these statements will be delivered or emailed to participants – electronic distribution may sound easy, but there are a lot of restrictions implied.
• Develop participant communications prior to issuing these statements, to explain the forms, their purpose, and how to use them.
• Find out your Transfer Control Code for e-filing. This may be obtained through your payroll department or the third-party provider that files your Forms W-2.
• Prepare to conduct a test filing through the IRS Filing Information Returns Electronically (FIRE) system, which will likely be available in Q4 2010.