Understanding Compliance Under Section 6039

January 03, 2024

Here we are, it’s that time of year again, section 6039 season, and whether your company offers ISOs, an ESPP, or a combination of both, it’s crucial that you’re prepared for what can be a time of high stress and pressure for many.

Under Section 6039, there are deadlines and requirements that need to be met in order for your company to remain compliant and safe from any potential fees. Understanding these deadlines and requirements is a critical aspect of corporate responsibility and financial governance and in this article, we will be going over what exactly those deadlines and requirements are.

Requirements Under Section 6039

To begin with, let’s demystify the requirements of Section 6039. This section of the Internal Revenue Code mandates that employers provide detailed information to the IRS and to employees for the following transactions in tax qualified equity arrangements:

When employees exercise incentive stock options.
When shares are transferred under a qualified section 423 employee stock purchase plan.

For ISOs, the exercise of the incentive stock options will trigger the requirement for the employer to file Form 3921 with the IRS and furnish a copy of the filing (or substitute statement) to the employee.

For a qualified section 423 ESPP, the first legal transfer of title of shares acquired by the employee under an Section 423 qualified ESPP will trigger the requirement for the employer to file Form 3922 with the IRS and furnish a copy of the filing (or substitute statement) to the employee.

The reason behind these requirements under Section 6039 are primarily designed to ensure transparency and compliance with tax laws related to stock-based employee compensation. By mandating the filing of Form 3921 for ISO exercises and Form 3922 for ESPP transfers, Congress is hoping to help the IRS accurately track and audit reporting of the transactions reported on them.

This transparency is crucial not only for tax administration purposes but also to enable employees to understand and fulfill their tax obligations related to these benefits. Both forms include information employees must have to properly report ISO exercises and sales of ISO and ESPP shares on their tax returns. In fact, these forms can be very useful for helping employees understand how to report their sales.

Deadlines Under Section 6039

The deadlines for Section 6039 are not the same across the board, the method for filing as well as who is being furnished the forms are variables that can affect the deadlines. For example, form A, the copy meant to be furnished to the IRS will have different deadlines depending on whether you are filing electronically or via paper. Form B on the other hand, the copy meant to be distributed to the employee, will have a deadline that remains the same regardless of the medium in which the form is being distributed, but still different to that of the copy being sent to the IRS.

Below we’ve provided further clarification on these deadlines:

IRS Statements (Form A): The copy being sent to the IRS is identified as form A and will need to be delivered to the IRS on either February 28th or March 31st.

February 28th will be the deadline if you are filing via paper and March 31st if you are filing electronically. Both dates will always be the mandated deadlines under section 6039 unless they happen to fall on either a weekend or holiday, which in that case, the deadline will be pushed out to the following business day.

Please be aware though, that under Section 6039, if an employer needs to file a combination of 10 or more tax returns, including but not limited to Forms W-2, W-2G, 1042-S, various 1099 forms, and Forms 3921 or 3922, electronic filing does become mandatory.

Participant Statements (Form B): The copy being furnished to the employee identified as form B will need to be delivered by January 31st and like the deadlines for the IRS statements, January 31st will remain the deadline unless January 31st happens to fall on either a weekend or holiday, which in that event, the deadline will be pushed out to the following business day.

Penalties for Non-Compliance with Section 6039

Failing to meet the deadlines as mandated under Section 6039 can lead to significant penalties for employers. These penalties are structured to encourage timely and accurate filing of both IRS and participant statements and go as follows:

Late Filing Penalties: If an employer files after the deadline but within 30 days, the penalty is $60 per form, up to a maximum of $630,500 per year. For filings more than 30 days late but before August 1, the penalty increases to $120 per form, with a yearly cap of $1,891,500. Filing after August 1 or not filing at all results in a penalty of $310 per form, with the annual maximum reaching $3,783,000.

Intentional Disregard: If the IRS determines there's an intentional disregard of the filing requirements, the penalty is $630 per form, with no cap on the total amount.

Requesting Extensions Under Section 6039

If your company faces challenges meeting the Section 6039 deadlines, it's important to know that extensions are available. To request an extension for filing returns with the IRS, submit Form 8809. This form must be filed by the original deadline (February 28 for paper filings, March 31 for electronic filings). An automatic 30-day extension is granted if filed online. For hardships, an additional 30-day extension can be requested, but this requires a detailed explanation and is not automatically approved.

Similarly, for extending the deadline to distribute participant statements, write to the IRS's Information Reporting Program outlining your reasons. This request must be postmarked by January 31, and it is important to note that these extensions aren't guaranteed and are granted at the IRS's discretion.

Proactively managing these requests is key, so please don't wait until the last minute; apply as soon as you anticipate a delay because a proactive approach can help mitigate the risk of non-compliance and help you potentially avoid any fees.

Need More Information?

6039 season can be an intimidating and difficult time, especially for those that are new to the process, but there is help available! On the NASPP website we have a recently released program designed to help guide you through the entire filing process for both forms 3921 and 3922!

6039 Reporting: Filing Forms 3921 and 3922

By Jason Mann
Content Director

NASPP