Thousands of Small Firms Paid AMT They Didn’t Owe

Nearly 2,200 small corporations that should have been exempt from the federal alternative minimum tax (AMT) have paid it by mistake, resulting in millions in extra revenue for Uncle Sam.

A report by the Treasury Inspector General for Tax Administration suggests these filers were either confused by or unaware of exemptions to the AMT that would have lowered their 1998 tax bills by an average of about $12,000 each.

Federal auditors identified 2,343 small corporations that paid the alternative minimum tax in 1998. They examined 150 of those returns and found that 93% were exempt from the AMT. Based on that sample, they estimate that 2,178 small corporations sent the government too much money in error--more than $25 million in 1998.

However, the Internal Revenue Service hasn’t volunteered to send it back, which irritates Sen. Christopher “Kit” Bond (R-Mo.), chairman of the Senate Committee on Small Business. There is no automatic system for refunding overpayments of the AMT or alerting taxpayers to file for a refund. “If these taxpayers had underpaid their taxes, the IRS would certainly notify them,” he said.

The AMT is a parallel tax system that allows far fewer deductions than the regular income tax system. It was designed to prevent high-rollers from using deductions, credits and other benefits to get away with paying little or no income tax.

Small corporations generally are exempt from the AMT provided they meet certain revenue tests. In general, a corporation initially qualifies for the exemption if its average gross receipts were $5 million or less during its first three taxable years after Dec. 31, 1993. Thereafter, it would continue to be exempt as long as its average gross receipts for the prior three-year period don’t exceed $7.5 million.

The inspector general’s office recommended that the IRS issue a public announcement about AMT exemptions for small corporations and beef up its Web site to spread awareness.