Section 6039 Requires New Tax Reporting

Changes to Section 6039 were brought about so that they can enhance compliance making the reporting method easier for participants. These changes had been made efficient for transactions occurring in calendar year 2010 and later, so if you haven't already, now may possibly be a good time to think about how very best to incorporate these changes into your routine. Here's what you have to know to ensure your procedures are in compliance.

What is Section 6039

Historically, IRC Section 6039 necessary businesses granting ISOs or offering qualified ESPPs to transmit annual statements to participants who a) exercised an ISO or b) 1st transferred ESPP shares via a disposition or re-registration throughout the twelve months. The purpose of the reporting was to give the vital data for participants to accurately calculate and report revenue and tax obligations related to dispositions for qualified equity plans. These statements were issued by January 31 the following year and ordinarily followed a fundamental, flexible format. Regardless of the penalties for non-compliance, a lot of firms took a reasonably relaxed strategy to this requirement, utilizing physical exercise or obtain confirmations or year-end tax statements to fulfill the participant reporting obligation.

What Changes Were Made this year?

The brand new 6039 rules are intended to create the reporting process a lot easier for participants and also to lower non-compliance. For tax year 2010, organizations are needed to report the same transaction information to the IRS, and also the data components required to be reported have changed, especially on the ESPP side. The IRS has issued Types 3921 (ISOs) and 3922 (ESPPs) as guidelines for participant reporting; organizations could elect to use these formats, or a "substitute format" that aggregates a number of transactions into a single report to create the participant notification additional user friendly.

IRS filing must be performed electronically when the total quantity of exclusive forms exceeds 250, although the IRS recommends e-filing regardless of one's total amount. There's no alter to the participant reporting deadline of January 31; e-filing need to occur by March 31, comparable to Kind W-2 reporting for the IRS. Penalties for non-compliance can commence at up to $250,000/year for late or non-reported transactions and there's no maximum quantity for intentional disregard.

What You need to Do

In case you haven't already, start mastering and planning now.

• Familiarize oneself with the new rules and recognize the requirements. Also, it is significant to realize what events trigger this reporting. Read Publication 1220 for filing needs and have a look at the draft versions of Type 3921 and Kind 3922. Talk to your outside counsel regarding 6039 reporting obligations in unique circumstances, for instance mergers/ acquisitions, and remedy for non-U.S. employees.

• Fully grasp your options and spending budget for administration. Talk about your choices with internal and external partners.

• Decide in case your corporation intends to concern the formats of Forms 3921 and 3922 prepared by the IRS, or a substitute statement. In case you choose to use an alternative format, be certain it complies with the needs specified through the IRS. Make a decision regardless of whether these statements will likely be mailed or emailed to participants -- electronic distribution could sound easy, but you will find lots of restrictions involved.

• Develop participant communications just before issuing these statements, to explain the types, their purpose, and the best way to rely on them.

• Discover your Transfer Control Code for e-filing. This may be obtained by means of your payroll department or the third-party provider that files your Types W-2.

• Prepare to conduct a test filing via the IRS Filing Info Returns Electronically (FIRE) program, that will most likely be obtainable in Q4 2010.