IRS Waives Employer Reporting Obligation for Qualified Stock Options Exercised in 2007
For 2007 the IRS has waived the requirement that employers file an information return on the exercise of incentive stock options (ISO) or discounted options under a qualified Employee Stock Purchase Plan (ESPP). Employers must continue to provide certain written information (as described in more detail below) to any person who has exercised an ISO, or who has received discounted stock during the year pursuant to an ESPP.
Stock option filings and notices
The Internal Revenue Code (the “Code”) requires corporations to file an informational return with the IRS regarding ISO and discounted ESPP exercises that occurred during the year. However, because the IRS has not yet issued guidance on the time and manner for completing the informational return, the IRS has waived this requirement for 2007. The IRS intends to issue guidance on the reporting requirements during 2008.
In addition, the Code requires corporate employers to provide certain written information to any person who exercised an ISO during the year, or who received stock during the year, pursuant to the exercise of a discounted option under an ESPP. The information to be supplied, along with sample notices, is described in detail below.
What employers should do
As mentioned, employers must still supply certain information to employees. Under Code Section 6039(a), a corporation that issues stock pursuant to the exercise of an ISO during a calendar year must furnish a written statement to the stock recipient on or before Jan. 31 of the following calendar year.
In addition, a corporation that during a calendar year records (or has recorded by its transfer agent) a transfer of stock acquired under an employee stock purchase plan, where the option price is between 85 percent and 100 percent of the value of the stock (a plan established under Section 423(c) of the Code), must also furnish a written statement. Again, the statement must be furnished on or before Jan. 31 of the following year.
Sample notices are provided in the links below.
Who receives the notice?
All employees who exercised incentive stock options or acquired discounted shares pursuant to an ESPP during the prior year should receive an information statement.
What are the penalties for failing to comply?
The IRS imposes a penalty of $50 for each statement not timely furnished or containing incomplete or incorrect information. As a practical matter this is rarely an issue. However, the corporation may request an extension of 30 days in which to furnish the statements for good cause shown.
What information needs to be provided in the case of an ISO?
- The name, address and employer identification number of the corporation transferring the stock;
- The name, address, and identifying number of the person to whom the share or shares of stock were transferred;
- The name and address of the corporation the stock of which is the subject of the option (if other than the corporation transferring the stock);
- The date the option was granted;
- The date the shares were transferred to the person exercising the option;
- The fair market value of the stock at the time the option was exercised;
- The number of shares of stock transferred pursuant to the option;
- The type of option under which the transferred shares were acquired; and
- The total cost of all shares.
What information needs to be provided in the case of an ESPP?
- The name and address of the corporation whose stock is being transferred;
- The name, address, and identifying number of the person to whom the share or shares of stock were transferred;
- The date the stock was transferred;
- The number of shares to which title is being transferred; and
- The type of option under which the transferred shares were acquired.
What about disqualifying dispositions?
The IRS requires that the income of an employee from a disqualifying disposition be reported as "other compensation" on Form W-2. If a disqualifying disposition occurs, the corporation must report the income in order for the corporation to take a federal income tax deduction and to satisfy the corporation's reporting obligations.