“The Internal Revenue Service has agreed to suspend collection of alternative minimum tax on incentive stock options, Sen. Chuck Grassley said Friday.
The suspension of collection efforts will give Congress time to ease the burden on affected taxpayers, according to Grassley, R-Iowa, ranking Republican on the Senate Finance Committee and former committee chairman.
Alternative minimum tax is an alternate tax calculation system targeting high-income Americans that ensnares more people each year because it is not indexed for inflation. Incentive stock options are a type of employee stock option with a tax benefit, when exercised, of not having to pay ordinary income tax. Instead, the options are taxed at a capital gains rate. However, they involve more risk for the option holders because they must keep the options longer in order to qualify for the lower capital gains rate.
The application of alternative minimum tax to income from incentive stock options is widely regarded as unfair because it left thousands of taxpayers with huge tax bills on income they never actually realized. Most of the taxpayers had stock options on shares of the technology companies at which they were employed. They exercised the options just before the technology bubble burst in 2001 and 2002, causing the price of tech shares to plummet. But the IRS calculates the income based on the value of the shares at the time they were exercised rather than at the time they were sold. That left many taxpayers with huge tax bills without stock profits they could use to pay the IRS.
Among the victims of the tax were many employees of telecommunications companies operating in Cedar Rapids, such as McLeodUSA, now part of PAETEC, and MCI, now Verizon Business.
Ron Speltz of Ely, a McLeodUSA executive who now works at PAETEC, and his wife, June, crusaded nationally to correct the tax code, working with the Coalition for Tax Fairness and other groups. Their efforts were rewarded by a legislative fix in the Tax Relief and Health Care Act of 2006 that provided gradual refunds of previous payments. But the legislative fix did not stop the IRS from trying to collect the original tax, penalties and interest.
"These families are facing the garnishments of wages, foreclosures of homes, seizures of retirement accounts, and all the other tools available to the IRS to settle uncollected tax debts," said a letter to IRS Commissioner Douglas Shulman cosigned by Grassley and 26 other members of Congress.