Strike a deal.

• Author: Caplan, Robert M.
• Position: StockOptions

New clients Joe and Jane Bigdebt pay you a visit. They filed their 2000 tax returns late and sent them in without payment. They owe $400,000 in combined U.S. and California taxes, primarily due to their exercise of incentive stock options in 2000. Most of the tax they owe is alternative minimum tax since they didn't sell the shares by Dec. 31, 2000.

Joe and Jane make $200,000 per year. However they are heavily mortgaged and have a $600,000 margin loan. Their stock has dropped from a high of $240 (the day they exercised) to a current price of $1. They want to know what to do. Briefly their options are:

* Apply for an offer in compromise;

* Request an installment agreement;

* Hope for legislative change; or

* Pray the stock price goes up.

OFFER IN COMPROMISE

Jessie Weller, a San Francisco Bay Area IRS spokesperson, notes that the IRS does not have a special procedure to deal with OICs arising from stock options. Offers are considered on a case-by-case basis and granted based upon the taxpayer's ability to pay the deficiency over the maximum 10-year period allowed within the statute of limitations.

The IRS has changed the overall OIC program significantly as part of the 1998 Tax Act to increase efficiency and increase the criteria for acceptance. These changes are detailed at www.irs.gov.

An OIC is time consuming. Although the IRS internal guideline is to complete OICs within six months after submission, it's not currently meeting this goal. However, they have consolidated OIC processing at two service centers to expedite cases.

The Bigdebts may have difficulty having an OIC approved since they have an annual income of $200,000, and it would appear that the deficiency could be paid within 10 years.

CALIFORNIA OICs

The FTB also does not have a special procedure for stock option deficiencies and deals with these matters on a case-by-case basis.

Since many taxpayers have significant assets and the potential to earn high incomes, the FTB allows them additional time to pay the deficiency. The FTB does not require taxpayers to liquidate their stock holdings.

INSTALLMENT AGREEMENTS

A taxpayer may use Form 9465, Installment Agreement Request, to request an installment payment. This form generally is attached to the tax return when filed. The IRS cannot deny the request if the deficiency is less than $10,000 and certain tests are met. The IRS has the Option of accepting the request if the deficiency is between $10,000 and $25,000. If the deficiency is...