IRS to Suspend Collection Action for AMT
Temporary measure gives Congress time to act
By Kaye A. Thomas
Posted September 1, 2008
Action relates only to debts from exercise of incentive stock options years ago.
IRS Commissioner Douglas Shulman has sent a letter to taxwriters in Congress saying the agency will suspend collection action against those who owe AMT due to exercise of incentive stock options years ago — but only for the month of September.
The collapse of technology stock prices that began in March 2000 had many victims. Among them were people who exercised incentive stock options and held the shares in the hope of making a larger killing through the tax benefit of avoiding a disqualifying disposition, or further appreciation of the shares, or both. Many of these people ended up with tax liabilities under the alternative minimum tax that exceeded the value of their shares. Some paid the tax by whatever means were possible, dipping into their life savings or borrowing large sums. Others used an offer in compromise to reach an agreement with the IRS under which they would pay as much as they could and the remainder of the debt would be extinguished. There are some, though, who never paid the tax or reached an agreement to extinguish the debt. The IRS continues to pursue collection of this debt.
In response to this situation, Congress created a special version of the AMT credit. Normally this credit functions primarily as a way to prevent double taxation of the same income under both the AMT and the regular income tax. The new version allowed a refundable credit to people who were unable to recover AMT credit under the regular rules after a period of four years. (Detailed guidance on the refundable credit is available from links on this page.) The provision was poorly designed, however. On the one hand it provided a windfall to some people for whom relief wasn't justified. On the other, it failed to provide relief where it was truly needed, for several reasons:
- Those owing large amounts could claim only 20% of the credit per year, so it would take five years to claim the entire amount.
- The credit phased out for people at higher income levels, so these people received no relief even if they owed a tax that far exceeds their ability to pay.
- The credit is measured by the amount of AMT originally incurred, but the addition of interest and penalties have greatly increased the overall debt these taxpayers owe the IRS.
Legislation to expand the relief, at least partially addressing these problems, has been pending in Congress for some time but has yet to become law.
Exchange of letters
In a letter dated July 3, 2008, Chuck Grassley, ranking member of the Senate Finance Committee, asked the Commissioner of the IRS to suspend collection activity against these taxpayers while Congress takes action on the legislation. Here is the key paragraph of the Commissioner's response:
In response to your request, we are taking steps to identify all Collection cases that involve AMT ISO liabilities. To provide the Congress with an opportunity to enact the pending legislation, the IRS will not undertake any collection enforcement action through the end of this fiscal year on these cases. To the extent that taxpayers approach us in an attempt to reach payment arrangements during this period, we will continue to advise them of available options [sic]. We will also continue to make case-specific determinations about the taxpayer's ability to pay in reaching resolution. If the pending legislation is not enacted this fiscal year, the IRS will then continue to administer programs in accordance with current law, and in fairness to the thousands of taxpayers who have already made sacrifices to pay taxes due under this provision of the tax code.
Note that the current fiscal year ends September 30, so the Commissioner is in effect offering a one-month suspension of collection activities. It remains to be seen whether Congress will enact this legislation within that time frame, or whether the Commissioner will relent on that deadline if not.
- Commissioner's letter (PDF)
- Guide to Alternative Minimum Tax (AMT) (free online guide)
- Consider Your Options (book for option recipients)
- Equity Compensation Strategies (book for professional advisors)
- Jim Cramer's Approach: How Much Fun? (previous feature)
- Fairmark Forum (for questions and comments)