DEFINITION of 90-Day Letter

90-Day Letter is an IRS notice stating that there was a discrepancy or error within an individual’s taxes and they will be assessed unless petitioned. The taxpayer has 90 days to respond, otherwise the audit deficiencies will result in reassessment. Also known as a Notice of Deficiency. 

BREAKING DOWN 90-Day Letter

Once you receive your notice, you have 90 days (150 days if the notice is addressed to a person who is outside the country) from the date of the notice to file a petition with the Tax Court, if you want to challenge the tax the IRS proposed, according to the agency. These notices are usually sent after or audit, in the case of people who fail to file a tax return or who have unreported income.

What The Notice Means

If you don’t dispute the accuracy of the assessment the Internal Revenue Service has made, you won’t need to amend your tax return unless you have additional income, expenses, or credits that you want to report. In that case, all you need to do is sign Form 5564, Notice of Deficiency and return it to the IRS with a check attached to avoid additional interest and or penalties.

If you agree with the findings but have additional income, expenses, or credits to claim, it will be necessary to amend your original tax return with Form 1040-X. You can do this through your online tax prep service or your tax professional or fill out the form yourself.

It gets more complicated if you disagree with the IRS findings. If you think the IRS notice is incorrect, incomplete or otherwise mistaken, you can contact them with additional information that will shed light on the case. You have 90 days from the date of the notice to dispute the claim. You can ask the Tax Court to reassess or correct or eliminate the liability proposed by the deficiency notice. During the 90 days and any period the case is being reconsidered the IRS by law can’t assess or put your account into collection.

Many taxpayers use a tax professional or attorney to handle the dispute process if the amount in question is significant. 

If you lose the appeal and don’t or can’t pay, the government can file a federal tax lien against your wages, personal property, or your bank account. This is a claim against the assets, not the seizure of them. That happens when a federal tax levy occurs and the IRS actually seizes your property. Payment plans can also be worked out to avoid liens and seizure.

What Is the Alternative Minimum Tax?

An alternative minimum tax (AMT) places a floor on the percentage of taxes that a filer must pay to the government, no matter how many deductions or credits the filer may claim.

The United States currently has an alternative minimum tax for taxpayers who earn above certain income thresholds.

The AMT recalculates income tax after adding certain tax preference items back into adjusted gross income. It uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back into the taxpayer’s income to calculate their alternative minimum taxable income (AMTI), and then the AMT exemption is subtracted to determine the final taxable figure.

How the Alternative Minimum Tax Works

The difference between a taxpayer’s alternative minimum taxable income and his AMT exemption is taxed using the relevant rate schedule. This yields the tentative minimum tax (TMT).

If the tentative minimum tax is higher than the taxpayer’s regular tax liability for the year, then they pay the regular tax and the amount by which the tentative minimum tax exceeds the regular tax. In other words, the taxpayer pays the full tentative minimum tax.

There are two alternative minimum tax rates, 26% and 28%. For 2022, the 28% rate applies to excess alternative minimum taxable income of $206,100 or more for all taxpayers ($103,050 for married couples filing separate returns). For 2023, the 28% rate applies to excess alternative minimum taxable income of $220,700 or more for all taxpayers ($110,350 for married couples filing separate returns). The 26% rate applies to incomes up to those levels.

A taxpayer who has a high income and uses large tax breaks may owe a smaller percentage under the standard rules. If so, the taxpayer is obliged to recalculate the taxes owed under the alternative minimum tax system, which eliminates some of those tax breaks.

The taxpayer will owe whichever amount is higher.

AMT Exemption Amounts

For tax year 2022, the AMT exemption for single filers is $75,900. For married joint filers, the figure is $118,100. For tax year 2023, the figures are $81,300 for single filers and $126,500 for married joint filers.

Taxpayers have to complete Form 6251 to see whether they might owe AMT. First, they subtract the exemption amount from their income. If their AMT is less than the exemption, they do not have to pay AMT.

It’s important to note, though, that taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. For tax year 2022, the phase-out begins at $539,900 for single filers and $1,079,800 for couples filing jointly. For tax year 2023, the phase-out begins at $578,150 for single filers and $1,156,300.

Purpose of AMT

AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, in the past, the structure was not indexed to inflation or tax cuts. This can cause bracket creep, a condition in which middle-income taxpayers could be subject to this tax instead of just the wealthy taxpayers for whom AMT was invented. In 2012, however, Congress passed a law indexing the AMT exemption amount to inflation.

Calculating AMT

To determine if they owe AMT, individuals can use tax software that automatically does the calculation, or they can fill out IRS Form 6251. This form takes medical expenses, home mortgage interest, and several other miscellaneous deductions into account to help tax filers determine if their deductions are beyond an overall limit set by the IRS.

The form also requests information on certain types of income such as tax refunds, investment interest, and interest from private activity bonds, as well as numbers corresponding with capital gains or losses related to the disposition of property.

The IRS has specific formulas in place to determine which portion of this income and deductions the tax filers need to note on Form 6251. It uses another set of formulas to determine how these numbers lead to AMTI.

The Bottom Line

The Alternative Minimum Tax is an additional or parallel tax system in the U.S. that is designed to ensure that high-income individuals pay their fair share of taxes. Prior to the AMT, certain taxpayers paid little in the way of taxes, due to preferential treatment of certain income and expenses, or tax breaks.

What Is an Amended Return?

An amended return is a form filed in order to make corrections to a tax return from a previous year. An amended return can correct errors and claim a more advantageous tax status, such as a refund. For example, one might choose to file an amended return in instances of misreported earnings or tax credits. Mathematical errors, however, do not require amendments because the IRS automatically corrects for such errors when processing the tax return.

Who Should File an Amended Return?

All taxpayers are required to file their taxes annually for the previous tax year. Taxpayers may realize that they made a mistake in filling out their tax forms, or their circumstances may have changed after they have submitted or mailed a return that has been accepted by the government. If this occurs, the Internal Revenue Service (IRS) has provided a way for these individuals to redo their taxes by providing an amended return form, Form 1040-X, on the IRS website.

Not all errors need amending by the form. The IRS will spot and correct a mathematical error, for example, when the initial tax return is sent in for processing. When this happens, any refund owed will be adjusted and any extra tax liability due will be billed to the taxpayer. In the event that the individual fails to include a required form or schedule in their submitted original tax return, the IRS will send a letter requesting that they mail the missing information to one of their offices.

When to File an Amended Return

A taxpayer must file an amended return if:

• The taxpayer’s filing status for the tax year changed or was incorrectly entered. For example, if an individual filed as single but actually got married on the last day of the tax year, they will need to amend their return by filing their taxes under the appropriate status—married filing jointly (MFJ) or married filing separately (MFS).
• The number of dependents claimed is inaccurate. An amended return will be necessary if a taxpayer needs to claim additional dependents or remove dependents that were previously claimed. For example, a couple may have included a baby born in January before taxes were filed in April on the prior year’s tax return. That baby cannot be included on the previous year’s tax return because they were not born before the end of the year.
• Tax credits and deductions were claimed incorrectly or were not claimed. In the latter case, the taxpayer may have realized that they qualified for a credit or deduction and may want to file an amended return to reflect this.
• The income reported for the tax year was incorrect. If a taxpayer receives additional tax documents for the tax year (say a Form 1099 or a K-1 arrives in the mail after the tax deadline), they may file an amended tax return to report the additional income.
• Deductibility of certain expenses change as a result of legislation changes. Sometimes, legislation will come through after a taxpayer has filed a return that affects the deductibility of certain expenses. For example, the deduction for private mortgage insurance (PMI) originally expired on Dec. 31, 2017, due to the Tax Cuts and Jobs Act of 2017. The Consolidated Appropriations Act, signed into law in December 2019, extended the deduction through Dec. 31, 2020. This made the deduction available for the 2019 and 2020 tax years and retroactive for the 2018 tax year.
• Tax relief due to a natural disaster changes the taxpayer’s tax liability. This is a common issue for taxpayers who have been affected by a natural disaster, especially one in the later part of the tax year. The government frequently offers tax relief for those affected by natural disasters, but legislation may take longer to finalize than the typical tax season window allows. Taxpayers should pay their full tax liability as it sits when the tax return is due. If legislation changes, an amended return can be filed to reclaim any refund owed to them due to natural disaster tax relief.
• The taxpayer realizes that they owe more taxes than they actually paid. To avoid getting hit with a penalty from the government, they can file an amended return with the IRS.

How to Amend a Tax Return

Form 1040-X has three columns: A, B, and C. Under column A, the figure that was reported in the original or last-amended tax form is recorded. The taxpayer will need to input the adjusted or correct number in column C. The difference between columns A and C is reflected in column B. The adjustments made to a tax return will either result in a tax refund, balance due, or no tax change. The taxpayer also has to explain what changes they are making and the reasons for making each change in a section provided on the back of Form 1040-X.

Disadvantages of an Amended Tax Return

The drawback of filing an amended tax return is that Form 1040-X cannot be submitted electronically for every tax year, although the IRS has recently started accepting e-filed amended returns for tax year 2019. If filling out the form manually, the taxpayer has to mail the printed-out document to the IRS Service Center that processed the original tax form. The IRS manually processes amended returns, and the process can take 16 weeks—or even longer, if the amended return is not signed, is incomplete, has errors, requires additional information, needs clearance by the IRS bankruptcy department, has been routed to another specialized area, or has been affected by identity fraud.

There is, however, a three-year statute of limitations for issuing tax refund checks. Therefore, the taxpayer must file any amended returns that will result in a tax refund within three years after the date they filed the original tax return. An amended return filed to account for additional income or overstated deductions does not fall under any such statute and can be filed at any time.

Download Amended Tax Return Form Here

All current and prior revisions of the IRS Form 1040-X are available on the IRS website here.

What Is an American Depositary Share (ADS)?

An American depositary share (ADS) is an equity share of a non-U.S. company that is held by a U.S. depositary bank and is available for purchase by U.S. investors.

The entire issuance of shares by a foreign company is called an American Depositary Receipt (ADR), while the individual shares are referred to as ADSs. But the terms American Depositary Shares and American Depositary Receipts are often used interchangeably.

Understanding American Depositary Shares

An ADR is a negotiable certificate issued by a U.S. bank, under agreement with the foreign company, and is evidence of ownership of ADSs, much the same way a stock certificate denotes ownership of equity shares.

ADSs are meant to facilitate trading of the shares. They can trade over-the-counter (OTC) or on a major exchange such as the New York Stock Exchange (NYSE) or the Nasdaq (Nasdaq), depending on how much the foreign company is willing to comply with U.S. regulations. Listing on a major exchange generally requires the same level of reporting as that done by domestic companies, as well as adherence to Generally Accepted Accounting Principles (GAAP).

The Benefits of ADSs

Foreign companies that choose to offer shares on U.S. exchanges gain the advantage of a wider investor base, which can also lower costs of future capital. For U.S. investors, ADSs offer the opportunity to invest in foreign companies without dealing with currency conversions and other cross-border administrative hoops.

The Downside of ADSs

There is some currency risk involved in holding ADSs. Fluctuations in the exchange rate between the U.S. dollar and the foreign currency will have some effect on the price of shares as well as on any income payments, which must be converted into U.S. dollars.

Tax treatment of dividends from ADSs is also different. Most countries apply a withholding amount on dividends issued for ADRs. This withholding amount can vary. For example, Chile and Switzerland withhold 35% while France can withhold as much as 75% of the tax on dividends, in the case of non-cooperative countries within the EU. The withholding tax is in addition to the dividend tax already levied by U.S. authorities. The dividend tax can be avoided by ADR investors by filling out Form 1116 for foreign tax credit.

Real World Examples of ADSs

A single ADS often represents more than one share of common stock. Further, ADSs can “gap” up or down outside of U.S. trading hours, when trading is happening in the company’s home country and U.S. markets are closed.

For example, South Korea’s Woori Bank, a subsidiary of Woori Financial Group, has ADSs that are traded in the U.S. The bank’s ADS gapped up by $0.03 on July 20, 2016. A technical analysis of the price action on this ADS shows that for the past decade, its price continued higher two-thirds of the time after a gap up.