National Taxpayer Advocate Nina E. Olson’s list of objectives — detailed in the first of her two annual required reports to Congress — zeroes in on the problems that she intends to focus on during the fiscal year ahead.At least one of the objectives — which focuses on the liabilities of incentive stock options under the Alternative Minimum Tax — has a good chance of being resolved, according to Tim Carlson, president of the Coalition for Tax Fairness and pro bono attorney for a number of victims of the anomaly. “Pending legislation will fix it, and it has support from both sides of the aisle,” he said.

Under regular rules, incentive stock options are not taxable at the time that the option is granted or when the option is exercised. However, the spread between the option price and the fair market value of the stock upon the exercise of the ISO is income under the AMT.

During the bursting of the technology bubble in 2000 and 2001, many employees exercised their ISOs but did not sell their stock before the end of the year. As a result, many taxpayers learned later that they owed tax on paper gains that could not be offset by their paper losses.

And, as Olson noted, since ISO exercises were not subject to information reporting, the problem mainly affected honest taxpayers who diligently discovered their ISO-AMT liabilities and voluntarily reported their ISO exercises and resulting AMT liabilities on their returns.

“To make matters worse, in 2000 and 2001 the ISO-AMT problem was not well known,” she stated. “At the time, it was difficult to find a professional who understood both ISOs and the AMT well enough to explain the potential consequences.”

Congress addressed the problem in 2006 in Public Law 109-432, which allowed taxpayers to recover 20 percent of their AMT credits each year over the period beginning in 2007 and ending in 2012. However, Carlson observed, the legislation did not address the fact that taxpayers still need to pay their AMT liabilities timely, long before they can obtain the credits, and it failed to address the penalties and interest that accrued on unpaid liabilities.

“The 2006 legislation put in an income limit, so if a taxpayer was above a certain limit, he or she could not get the ISO-AMT refund,” he explained. “Also, the hope was that when Congress passed the 2006 legislation saying these overpayments would be refunded, the IRS would cease collecting. But that didn’t happen. The IRS just continues to collect. Their position is that the law said the money would be refunded, ‘but it didn’t say we should stop collecting, and by the way we’re still going to collect interest and penalties.’ So even if people could get refunds, they would be liable for interest and penalties, which would make them as bad off as they were eight years ago.”


For example, Richard Speltz thought that his employer was doing him a favor when it gave him ISOs to augment his $70,000 salary. Instead, the ISOs triggered a tax nightmare when he exercised them before the tech bubble burst, leaving him with stock that was nearly worthless, but a tax bill of $225,000. Speltz was invited by the White House to attend the signing ceremony for the legislation in 2006. But because the IRS continued its collection efforts, Speltz recently received a 10-day Notice of Levy, said Carlson.

“All he has left is his home, which is in Cedar Rapids, Iowa. Luckily he didn’t lose it to the recent flooding, but he could have lost it to the IRS,” he said. “We were able to get a temporary hold. In the meantime, members of Congress sent a bipartisan letter to [IRS] Commissioner Shulman asking the IRS to suspend their collection efforts while Congress is fixing the problem. It would be horrible if people on the cusp got their homes seized while the problem was about to be solved.”

The letter, signed by Senators Chuck Grassley, R-Iowa, John Kerry, D-Mass., Maria Cantwell, D-Wash., and Barbara Boxer, D-Calif., as well as several other members of Congress, stated that there is a strong bicameral commitment to enact legislation that will abate all interest and penalties attributable to ISO-AMT liabilities and permit taxpayers to apply the full amount of their future refundable credits towards the entirety of their current liabilities.

“In light of that commitment, we are writing to ask that you use the discretion provided the IRS by its effective tax administration authority to suspend efforts to collect ISO-AMT liabilities while Congress acts to fix this situation, and to take Congress’ determination to act in this matter into consideration when allocating limited collection resources this year,” it stated.

“There’s been great support from both sides of the aisle,” said Carlson. “The new legislation removes the income phase-outs and then explicitly abates ongoing liability and interest and penalties, and if interest and penalties have been collected, it makes those refundable. I’m very optimistic that the problem will be fixed properly, and people will finally be able to get on with their lives.”


Olson listed taxpayer rights in collection as another issue that she would examine.

The IRS’s failure to follow its own policies and the Internal Revenue Manual are one aspect of the collection process that needs further study, she indicated. Although IRS Policy Statement 5-34 provides that seizure action is usually the last option in the collection process, the Taxpayer Advocate Service is now seeing an inclination toward seizure, despite the existence of viable alternative collection methods, she said.

“It goes even further than that,” explained E. Martin Davidoff, president of the American Association of Attorney-CPAs. “For example, a taxpayer provides financial information in good faith. The taxpayer tells the IRS he can pay $300 per month, and the IRS says, ‘No, you can pay $800,’ and goes ahead and levies. What’s happened is that the taxpayer has made a request for an installment agreement, even if it’s inartful. In effect, the IRS has denied the taxpayer his or her request for an installment agreement and not provided the taxpayer his or her appeal rights that they are entitled to under the IRM! I raised this issue with an IRS official, who quipped that it was not an ‘official request!’ In my mind, this official was not taking the problem seriously.”

“Many of these transactions take place over the phone,” said Davidoff. “The taxpayer gives the telephone assister their information, it gets plugged into a computer and out comes a number. The taxpayer can’t imagine how such a large number came about. When he says, ‘I can’t pay that much, I can only pay this much,’ and the IRS refuses to accept ‘this much,’ the IRS doesn’t consider that a denial of a request for an installment agreement, but that’s exactly what it is. When the IRS turns down a request for an installment agreement, the taxpayer has a right to appeal, and no collection activity should be undertaken while the appeal is pending.”

The objectives report is one of two reports that Olson is required to submit to the House Ways & Means and Senate Finance Committee each year. The second is her recommendations report to Congress.

For the complete report, go to,,id=184546,00.html.

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