Confusion, lack of information lead to overpayments, but no refunds likely
A newly completed study reveals that over 2,000 small companies may have overpaid their taxes by an average of $11,638. These overpayments are the result of confusion by or a lack of awareness of the small-corporation exemption from the Alternative Minimum Tax (AMT),
Senator Christopher S. "Kit" Bond, Chairman of the Senate Committee on Small Business, said he is alarmed by the findings. The study was prepared by the Treasury Inspector General for Tax Administration (TIGTA). "These overpayments are especially troubling because there is no automatic system for refunding them or even alerting the taxpayers who have mistakenly overpaid," he said.
"If these taxpayers had underpaid their taxes, the IRS would certainly notify them that more taxes are due. In this case, however, they will receive a refund only if they realize their own mistake and file an amended tax return," Bond said. "In an area of tax law as complex as the AMT, that is a lot to expect from small businesses struggling to comply with the overly- complicated tax law while running a successful enterprise."
Over 90 percent of small firms qualified for AMT exemption
The TIGTA study found that 93 percent of the small corporations sampled qualified for the small-corporation exemption first enacted by Congress in 1997. Nonetheless, they erroneously paid an average of $11,638 in the AMT. In fact, the study estimated that in tax year 1998 these small-corporate taxpayers paid over $25 million more than the tax law requires.
In a letter to IRS Commissioner Charles Rossotti and IRS Small Business/Self-Employed Division Commissioner Joe Kehoe, Bond called on the IRS to take immediate action to help affected taxpayers. "In keeping the IRS' mission of providing top-quality service by helping taxpayers understand and meet their tax responsibilities, I request that you give prompt attention to steps that can be taken to assist small corporations that overpaid their taxes and to help all small-corporate taxpayers avoid such overpayment as a result of the AMT in the future," Bond wrote. He also alerted small business organizations and asked them to spread word of the problem to their members.
Small corporations generally are exempted from the AMT under Section 55(e) of the Internal Revenue Code, provided they meet certain gross receipt tests. A corporation initially qualifies for the exemption if its average gross receipts were $5 million or less during its first three taxable years beginning after December 31, 1993. Thereafter, a small corporation can continue to qualify for the AMT exemption so long as its average gross receipts for the prior three-year period do not exceed $7.5 million.
"Congress created the small-corporation exemption from the AMT in response to pleas from small businesses faced with the burdensome complexities of the AMT," Bond said. "But taxpayers can only benefit from these exemptions if they know about them and understand them. These overpayments clearly indicates that we have much work to do in this area and they also underscore the need for a simpler, fairer, and flatter tax code in general."
Edited by Bob Arguero, Managing Editor, GovCon