During the dotcom boom, many employees of internet-related companies took advantage of incentive stock options (ISOs) that allowed them to acquire shares of the company stock at significantly discounted prices. Although, for regular tax purposes, the gain from the exercise of options is not taxable until the stock is ultimately sold, it is subject to the alternative minimum tax (AMT) in the year the option is exercised.

Thus, there would have been significant tax in the year of exercise, but no money from the stock since it is required to be held for one year to qualify for the beneficial long-term capital gains rates. To many, it was a balancing act since they would put their returns on extension and then sell some or all of the stock after a year to receive the cash to pay the AMT tax.

When the tech bubble burst in 2000, the stocks for which these individuals incurred an AMT liability plunged in value, and they found themselves owing an AMT on income they would never see. This left many in that industry with huge tax liabilities on income that would never be realized. The IRS has taken a hard line stance on the issue noting that the taxpayers had the opportunity to sell the stock when they exercised the option and pay tax on the ordinary income from the sale. Instead, they knowingly chose the more risky avenue in an attempt to reduce the tax burden and, as a result, got burned in a stock melt down. Thus, the IRS (and apparently Congress) are making no effort to relieve those affected except through existing procedures.

Recently, one of the affected taxpayers filed an offer-in-compromise where he offered to pay $4,457, the cash value of his life insurance policy, against the liability that then exceeded $125,000. His offer was based on doubt as to collectibility and his inability to pay the full amount due to insufficient assets and income. He also attached a statement in which he explained that an offer-in-compromise was necessary because of the impact the AMT had on his family's finances and lifestyle in 2000. The statement included information about his family, their finances and his mental anguish and frustration with the unfairness of the situation posed by the AMT problem.

An IRS Revenue Officer rejected the offer because the taxpayer had the ability to pay the outstanding tax liability in full and apprised him of his options. The issue ultimately ended up in tax court where the court concluded that the taxpayer failed to establish that IRS abused its discretion on the basis of the promotion of effective tax administration when it refused his OIC. The Court said that the factors outlined in the regulations that support a finding of economic hardship describe more dire circumstances than the contentions made by the taxpayer.