IRS stops collection of AMT taxes on losing stock options

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The IRS has announced that it will temporarily halt collection of alternative minimum taxes owed by taxpayers who exercised incentive stock options.

IRS Commissioner Doug Shulman announced the ban on collecting the AMT, interest and penalties will be in effect until Sept. 30. The hiatus is designed to give Congress time to provide workers relief from debts incurred when they exercised options but the stock value dropped severely before they were sold.

Incentive stock options allow holders to get a lower tax rate on their profits, as long as they held onto the stock for at least a year after exercising their option. But as the workers followed the law and held the stock, the value dropped, which ensnared them in alternative minimum tax rules. As described by Bloomberg News, the AMT applies to the spread between the option price and the exercise price, regardless of the value of the shares when sold. On the first $175,000 of income, the AMT rate amounts to 26 percent and 28 percent on amounts above that.

Many viewed the application of AMT in this situation as unfair because taxpayers were left with big tax bills on income they never actually realized. Many of these stock options were on shares of technology companies where these taxpayers worked. They exercised their options just before the dot-com bubble burst and the tech share values plummeted. Because the IRS calculates the income based on the share value at the time they were exercised rather than at the time of the sale, big tax bills resulted.

The IRS made the move after hearing from several members of Congress, including Sen. Charles Grassley, (R-IA). "Taxpayers in this situation faced a lot of income tax on very little income," said Grassley, the top Republican on the Senate Finance Committee.

In 2006, Congress provided gradual refunds of previous payments, but the legislation did not bar the IRS from collecting the original tax, along with penalties and interest. Congress is now considering new legislation.

In a letter to Shulman, Grassley wrote, "There is now a very broad bipartisan consensus to abate all interest and penalties attributable to ISO AMT liabilities and permit taxpayers to apply the full amount of their future refundable credits toward the entirety of their ISO AMT liabilities."

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