Saturday, April 16, 2005

THIS GUY WANTS YOUR SYMPATHY... BUT SHOULD HE GET IT?

THIS GUY WANTS YOUR SYMPATHY... BUT SHOULD HE GET IT?

In a story about the IRS and how it's going to audit the heck out of people this coming year, Yahoo! cited the story of Eric Delore of Alameda, Calif., who owes the IRS more than $400,000. Delore owes the money because he received incentive stock options from his former employer; Yahoo! says these options "pushed him into the nightmare world of the alternative minimum tax."

The alternative minimum tax originally was created to prevent wealthy individuals from using loopholes to avoid paying taxes. Apparently, taxpayers who live in high-tax states or receive incentive stock options are particularly vulnerable.

In 2000, Delore exercised stock options worth $1.1 million. Rather than pay the tax he would have owed at the time, he held on to them so he could get a better tax rate when he sold.

You know what happened in 2000. The stock price of his company plummeted. When Delore sold his shares, they were worth $5,000. But the IRS says no matter what he sold them for, they were worth $1.1 million, and he therefore owed $420,000 tax bill.

It gets worse. In 2001, Delore's employer filed for bankruptcy, and he lost his job.

He got another job, but it just gave the IRS something to glom onto after it emptied his bank accounts and put a lien on his house. The IRS won't negotiate his tax bill lower, so Delore will file for bankruptcy if the IRS won't take his latest offer. Not good for a man with a wife and two small children. Never mind what the new bankruptcy rules will do to him.

Delore now believes he took a big risk when he told the IRS that he exercised his options. He says horror stories like his encourage taxpayers to break the law. The government "should make compliance easier," he says. "Then you'll get more people paying their taxes."

This is indeed a sad story. But, I want to know more. For instance, when he exercised his options, they were indeed worth $1.1 million. Yes, he would have had to pay $420,000 on them when he sold them, but he'd still have $780,000 in the bank on options that probably didn't cost him anywhere near the $1.1 million. So... isn't this just plain greed? Shouldn't somebody have advised him to do just that? Did he get advice from a professional to hold onto the options? If so, shouldn't he be able to sue that professional for what he owes the IRS?

All of this, of course, as I just barely got my extension in. I'm still paying off bills I ran up while self-employed, I'm now unemployed (and remember, that unemployment check is taxable income, as my mother discovered unhappily 25 years ago), and if my best friend and accountant, Joe Confreda (of Garen & Company; tell him I sent you) is right, the only reason I didn't owe money this year was because we had the IRS hold over $1,000 of last year's refund. But at least I didn't try to take big wads of money and turn it into a bigger wad of money, and then complain when it didn't work out.

I think the upshot here isn't that the alternative minimum tax is evil; I think the upshot here is that if you're going to play in the big leagues, you've got to be prepared to take one in the butt from Clemens occasionally.

Wow, I just wrote a piece supporting the IRS. Maybe the the Republicans are right about us liberals.


2 comments:

Vavoom said...

This is a great post and a fantastic blog. How right you are, this guy really should have gotten some professional advice. AMT sucks, but this guy's financial advisor was worse.

Jim Chadwick said...

One of the reasons why I never want to freelance full time again is because I never make a steady enough income to be able to estimate my taxes with any degree of accuracy, and even when I make my best guess, I never have enough in the bank to pay them when they are owed. So I always have to pay a penalty come filing time and come up with enough deductions to hopefully offset both the penalty and what I owe. Therefore, I owed money for 2003, which I just finished paying off. Working full time, as I did in 2004, I always have the highest possible amount of money witheld from my check, usually getting me a refund. This year, my taxes were incredibly straight forward and as soon as I lost my job at the end of January, I had my accountant do my filing right away so that I got something back right when I needed it. God knows what next year is going to be like for me, with some full time, some unemployment, and if I don' t find something full time soon, more freelance again. But it was nice to not have to dread tax time this year for the first time in ages.