Abatement of Unpaid AMT

Preliminary to claiming the refundable AMT credit

By Kaye A. Thomas
Posted March 14, 2009

You didn't pay? We forgive you.

The tech stock collapse that began in 2000 left some people with AMT liabilities far beyond their ability to pay. Some of them had to deal with IRS collection efforts over a number of years. The original version of the refundable AMT credit did little to remedy this situation. Someone who owed $1,000,000 to the IRS might qualify a credit of $200,000 or less. The IRS would apply that credit against the amount owed and continue trying to collect the remaining amount. The new version does away with that problem.

Abatement of unpaid tax

The law says that if, as of October 3, 2008, you owed AMT as a result of exercising an incentive stock option ("ISO") in 2007 or any prior year, the tax is abated. That means you don't have to pay it. The tax is wiped off the slate. You don't have to pay interest or penalties relating to that unpaid tax, either. It's as if you never owed it.

Only for AMT from exercising ISOs. This relief doesn't extend to AMT you might owe for any reason other than exercising an incentive stock option. Even if your unpaid AMT relates to a "timing adjustment" (the kind of adjustment that allows you to claim AMT credit later), tax abatement doesn't apply unless it was the specific timing adjustment that applies when you exercise an ISO and hold the stock after the end of the year of exercise.

No credit for unpaid tax. Naturally, if you escaped having to pay AMT as a result of this provision, you can't claim a credit for this unpaid tax.

Unhappy campers

It isn't at all clear why Congress extended this provision to unpaid tax from 2007. People who paid AMT for that year aren't allowed to claim a refund. They have to wait until they're able to claim the AMT credit, something that may not occur for several years. Meanwhile, someone who didn't pay the tax got off scot-free, regardless of whether their nonpayment was due to hardship or forgetfulness or even outright cheating. We've seen some bitter complaints about this from people who paid their tax in 2007 or other recent years.