Subject: ISO AMT Comment: Susan Wheeler, Individual March 16, 2005 I am writing because my daughter and son-in-law have been caught up in the Alternative Minimum Tax nightmare since the end of 2000. It is my understanding this law was passed in order to ensure that superrich taxpayers who had found ways to evade paying any taxes would pay a fair tax. But the way it has worked in this case is to trap and torment for the past four and a half years a middle income high tech worker who had heretofore faithfully complied with all the tax requirements and paid very substantial taxes. Despite paying thousands of dollars to accountants and attorneys there still seems to be no way out and my daughter and her family are facing bankruptcy and loss of everything including her home and her pension accumulated over her 20 year work life. My daughter went to work for a high tech start up company after working in the field of electronic engineering for close to 20 years. She was highly paid, but she gave up salary in order to contribute her talents to the startup, which offered stock options as part of a package. In 2000, she exercised a large part of her stock options when the price was high, but then came the crash. Although she was advised to sell her stock, she was unable to do so because she was locked out. The exercise of her options triggered the AMT, and under the AMT she now owed over $700,000 in taxes on stock that was not worth anywhere near that amount. She attempted to negotiate with the IRS through the Offer in Compromise program. Having lost her job when the company collapsed, she and her husband moved out of the Bay Area to the Chico area. Their income dropped precipitously. However, in considering her offer in compromise in the area of $320,000, which she would pay by liquidating all her assets, the IRS didn’t accept because they based her income earning potential on the money she got from selling the stock in order to pay the taxes. IRS said she could earn $30,000 a month (yes, a month) for the next four years and they would take all of that except for a poverty level allowance for her family to survive on. This was their response in spite of the fact that the taxes were owed on “phantom” income which she had never received, and in spite of the fact that essentially she was paying up front a tax that she theoretically would recoup in subsequent years as a small annual “tax credit.” Essentially she was making a loan to the government. She and her husband went through one law firm that claimed to be expert in taxation but this firm seemed not to have a grasp on the AMT. It has now filed for bankruptcy itself. They are now working with a law firm that worked very hard at developing a legal theory to help the many people who were caught in this horrendous trap that has led to at least one suicide. In this law firm they have been through several different attorneys, and several different strategies to try to resolve the problem. One strategy was to file amended returns based on a novel legal theory that appears promising. The response of the IRS has been to ignore the amended returns and thus this strategy appears to be in limbo. There have been some court decisions that raise pertinent questions about the fairness of this application of the AMT, which is not surprising since the Tax Payer Advocate Nina Olsen herself said the AMT was the most pressing taxpayer problem today and that its impact was unfair. However, in the meantime, the IRS is levying on property and people like my daughter and her husband are stressed to the point of breaking. They have been forced to consult with a bankruptcy attorney (more legal fees) who says even in bankruptcy the prospects are bleak since the IRS has levied on their property and will take everything, possibly even the homestead exemption. To me this phenomenon is like killing the goose that laid the golden egg. My daughter has been too depressed for the past four years to work, which has eliminated a source of steady and substantial taxes for the government. Her husband has worked by purchasing and remodeling old houses and now faces having all his work confiscated by the IRS. It doesn’t seem to me to promote effective tax administration and it seems to fit the definition of hardship to take everything away from them due to the arcane workings of a law that most people don’t understand, including attorneys and accountants. I understand at least one court has commented that the tax rate in a situation where the tax due is 250% of the taxpayer’s annual income is too high, but that is what is happening to people. But the IRS says it has to go by the law and so they just can’t do anything else but take everything. I was diagnosed with incurable cancer in November of 2001. My daughter has been living with my struggle to stay alive at the same time this horror is hanging over her. My death fairly soon appears to be inevitable. I just have to hope that somewhere, somehow, her complete financial ruin is not as inevitable. I cannot bear to think of her not only losing her mother but also losing her home and all her assets after putting in many years as a loving daughter and talented and faithful worker and taxpayer. Yes, I know, nothing’s for sure but death and taxes, but this Alternative Minimum Tax on phantom income from incentive stock options really isn’t fair and should not be inevitable. Susan E. Wheeler, 3-16-05 2929 SE 112th Avenue Portland, Oregon 97266 |