Many small business owners are unaware of the small corporation exemption from paying AMT. The IRS may owe thousands of dollars in overpaid taxes.
If you are a small corporation and have paid alternative minimum taxes in recent years, you may have paid the government many thousands of dollars more in taxes than was necessary.
A recent study prepared by the Treasury Inspector General for Tax Administration (TIGTA), has found that more than 2,000 small companies, either unaware of or confused by the small-corporation exemption from the Alternative Minimum Tax (AMT), may have overpaid their taxes by an average of $11,638.
Although the IRS routinely notifies taxpayers of underpayments, Senator Christopher (“Kit”) Bond, Chairman of the Senate Committee on Small Business, notes that “These overpayments are especially troubling because there is no automatic system for refunding them or even alerting the taxpayers who have mistakenly overpaid.” Thus, at the present time, small corporations who were unaware of the small corporation AMT exemption will receive a refund only if they realize their own mistake and file an amended tax return.
The TIGTA study found that 93 percent of the small corporations sampled qualified for the small-corporation AMT exemption, which was first enacted by Congress in 1997. Nonetheless, they erroneously paid an average of $11,638 in the AMT. In fact, the TIGTA study estimated that in tax year 1998 these small-corporate taxpayers paid over $25 million more than the tax law requires.
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.”
Senator Bond has asked the IRS to “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” However, if you believe you could have paid the alternative minimum tax in error, contact your tax advisor to discuss the advisability of filing an amended return.