Recent Tax Court Decisions Point Out ACA Pitfalls For Taxpayers

In today’s guest post we welcome back Christine Speidel. Ms. Speidel is an attorney with the Vermont Low Income Taxpayer Clinic and the Office of the Health Care Advocate, both at Vermont Legal Aid. She has a particular interest in health care reform as it affects low-income taxpayers. Christine is the author of the 2016 update of the Affordable Care Act chapter of “Effectively Representing Your Client before the IRS” and a nationally recognized expert on the intersection of tax law and health law. In today’s post, Christine discusses the Premium Tax Credit, and two situations where taxpayers were left with sizeable tax deficiencies after purchasing insurance.

An earlier version of this post appeared on the Forbes PT site on July 20, 2017.

The first round of deficiency cases involving the premium tax credit are still working their way through the Tax Court. So far, the decisions apply the law in a straightforward way, but they illuminate certain issues that may not be commonly known.

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Not all ACA-compliant insurance plans qualify a taxpayer for PTC

The first opinion I am aware of is Nelson v. Commissioner, from April 2017. The holding is based on a straightforward application of the Code, but it exposes a confusing feature of the ACA: tax credits are only available for plans purchased through an ACA exchange. I.R.C. § 36B(c)(2)(A)(i). Government communications to taxpayers use the term Marketplace, which the Nelsons claimed was confusing and caused them to think that their health insurance qualified them for a PTC.

In 2014 the Nelsons purchased health insurance from Kaiser Permanente, and they claimed a premium tax credit (PTC) on their income tax return based on that coverage. After all, they had purchased a plan on the insurance “market.” However, the Service disallowed the claim when it did not see a record of any exchange plan for the Nelsons. As required by section 36B, the Court upheld the deficiency.

On its face, the Nelsons’ contention is plausible. The record does not have any details of the insurance plan that the Nelsons purchased, but it could have been perfectly good coverage. (In Vermont, the exact same insurance plans are sold on and off the exchange.) It seems strange that ACA-compliant insurance (in terms of benefits and plan design) might not qualify for a PTC just because of where it was purchased.

There is a further wrinkle that is not discussed in the Nelson case. In many states a taxpayer actually can purchase a PTC-qualifying plan directly from an insurance company. This is called “direct enrollment in a manner considered to be through an exchange”, and it is arranged between the exchange and its participating insurance companies. See 45 C.F.R. § 156.1230. This hybrid enrollment affords the taxpayer the right to claim a PTC, and a Form 1095-A with which to claim it. The exchange issues a 1095-A for exchange “direct enrolled” plans, as it does with ordinary exchange enrollments. For 2018, CMS is making direct enrollment more streamlined and will not require the insurer’s website to redirect the taxpayer to the exchange site for an eligibility determination, as has been the case in prior years. It will be very important for companies to communicate clearly so that consumers know whether they are purchasing a PTC-eligible plan.

Any plan that qualifies for the PTC should generate a Form 1095-A to the taxpayer. This is of little comfort to those who were expecting a 1095-A but do not receive one.

Taxpayers pay for Exchange APTC errors

Recently the Tax Court issued its first opinion on reconciliation of advance PTC (APTC) payments. The result is quite harsh: a semi-retired couple owes nearly $13,000 in additional income tax because Covered California miscalculated their eligibility for the PTC. Walker v Comm’r, T.C. Summary Opinion 2017-50. There is no indication that the taxpayers misrepresented their income; rather, it appears that the exchange erred in finding the Walkers financially eligible.

This outcome is no surprise; it is a foreseeable consequence of the system’s design. During the annual open enrollment period, exchanges estimate applicants’ annual income for the upcoming tax year and authorize health insurance subsidies based on that estimate. See 45 C.F.R. § 155.305. (Exchange open enrollment for 2018 is November 1 through December 15, 2017.) Taxpayers calculate their actual PTC over a year later, on the income tax return for the tax year. If the exchange authorized too little PTC, the taxpayer receives the additional amount as a refundable credit. If the exchange authorized too much, the taxpayer owes the excess as an additional income tax liability. I.R.C. § 36B(f)(2). (Taxpayers can also pay full freight and claim their entire credit at tax time. Most taxpayers who are eligible for the PTC cannot afford to do this. Nationally, about 83% of 2017 healthcare.gov enrollees receive APTC.)

Unfortunately, it is not uncommon to see exchange errors in PTC determinations, particularly for 2014 when the system was brand new. For example, in early 2015 CMS acknowledged that healthcare.gov had been inflating taxpayers’ income by counting all Social Security payments received by children. Anecdotally, several Vermont tax preparers have reported that clients with investment income were only asked about wages and other very common sources of income when they applied over the phone. Thus the exchange undercounted their income for the PTC and caused them an additional income tax obligation.

Data matching and other systemic protections are supposed to ensure that APTC determinations are as accurate as possible. However, not all of these systems have been developed or implemented, and certainly many were not for 2014. Indeed, last week the GAO issued a blistering report on deficits in HHS and IRS controls against improper PTC payments. GAO-17-467. Thankfully APTC calculators are available to check eligibility for the current year, so consumers and their advisors can double-check eligibility determinations that seem off.

Taxpayers up to 400% of the federal poverty level (FPL) are somewhat protected from exchanges under-estimating their income, since their excess APTC repayment obligation is capped. I.R.C. § 36B(f)(2)(B). Once 400% FPL is reached, however, the taxpayer must repay all erroneous APTC. This is why the Walkers have such a large deficiency. The Walkers reported an adjusted gross income of just over $63,000. If the Walkers’ household income (or modified adjusted gross income, which includes the nontaxable Social Security) had been $62,000 (just under 400% FPL for purposes of the 2014 PTC), their repayment would have been capped at $2,500. I.R.C. § 36B(f)(2)(B)(i); see also 2014 Form 8962 instructions, Table 1-1 and Table 5. There is an enormous liability cliff for taxpayers who reach the 400% FPL income level. The National Taxpayer Advocate discussed the problem in her 2015 Annual Report to Congress and her 2017 Objectives Report to Congress, particularly with respect to taxpayers who unexpectedly receive lump sum Social Security payments. Under current law, the cliff applies to all taxpayers regardless of fault or foreseeability.

The magnitude of the Walkers’ debt underscores how expensive comprehensive coverage with a capped out-of-pocket exposure can be for older people, and accordingly how valuable the PTC is for them. (For a nice visual of how PTC is calculated, see Figure 1 in this PTC fact sheet by the Center on Budget and Policy Priorities.) It also explains why some health policy experts believe that the ACA set its individual shared responsibility payment (ISRP) too low. The Walkers told the Court that they would not have purchased insurance if they had known they were not eligible for subsidies. This is completely plausible. If they had gone without insurance, the Walkers’ ISRP for 2014 would have been $431 (assuming both spouses were under 65). (Both the Taxpayer Advocate Service and the Tax Policy Center have ISRP estimators online. For readers using the TAS ISRP estimator, note that nontaxable Social Security is not counted in household income for the ISRP.) The ISRP was gradually phased in, so 2014 amounts are particularly low. However, even under the fully-implemented ISRP for 2016, a married couple under 65 with household income of $63,417 would only pay a penalty of $1,390. Compared to $13,000 for the exchange plan the Walkers chose, it’s conceivable that healthy taxpayers would take the risk. Even a bronze-level plan would most likely cost more than the Walkers’ ISRP.

The Walkers’ situation raises complicated policy questions about how best to strengthen the individual insurance market and provide robust coverage to people of all income levels and health statuses. Suffice it to say that there is no agreement in Congress on how to solve the problem.

 

What is the Meaning of the Affordable Care Act Executive Order

In today’s guest post we welcome back Christine Speidel. Ms. Speidel is an attorney with the Vermont Low Income Taxpayer Clinic and the Office of the Health Care Advocate, both at Vermont Legal Aid. She has a particular interest in health care reform as it affects low-income taxpayers. Christine is the author of the 2016 update of the Affordable Care Act chapter of “Effectively Representing Your Client before the IRS.”  Keith

The 2017 tax filing season is underway, and tax professionals are wondering what effect President Trump’s recent executive orders will have on their clients. At the top of the list is the January 20 order regarding the Affordable Care Act (ACA).

The most frequent and persistent question about the order is whether taxpayers can ignore the shared responsibility provision on their 2016 tax returns. Preparers have also asked whether taxpayers still have to reconcile advance payments of the Premium Tax Credit for 2016.

As others have explained (e.g. Timothy Jost, Nicholas Bagley), the executive order changes nothing right now for taxpayers or health insurance consumers. It does not change taxpayers’ obligations on 2016 tax returns.

It is understandable that people reading the order could misunderstand its effects. The order contains very broad language. It directs federal executive departments and agencies (including HHS, Labor, and the Treasury) to “exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications” within “the maximum extent permitted by law.” (Sec. 2.) The limiting clause is easy to skim over, but it is crucial.

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The federal Administrative Procedure Act (APA) also limits the executive branch’s ability to quickly change federal regulations implementing the ACA. Indeed, the executive order recognizes that revision of existing regulations promulgated through notice-and-comment rulemaking must comply with the APA. (Sec. 5).

APA-compliant changes in federal rules cannot happen overnight. In implementing the laws passed by Congress, the executive branch may resolve ambiguities and fill in statutory gaps. However, when an agency changes its interpretation of a statute, for the new interpretation to have the force of law the agency must “display awareness that it is changing position and show that there are good reasons for the new policy.” Encino Motorcars v. Navarro, Slip op. at 9 (internal quotation marks omitted). It is easier to change federal agency interpretations that do not have the force of law (see Perez v. Mortgage Bankers), but the deference to be afforded those interpretations is a matter of hot debate and may ultimately depend on the future composition of the Supreme Court.

Some changes in ACA implementation could happen relatively quickly, but to date no concrete changes have been announced by the relevant federal agencies. Current federal law and regulations provide for flexibility and discretion in certain areas. The Department of Health and Human Services (HHS), for example, has discretion to define hardship criteria for exemption from the individual shared responsibly provision. 45 C.F.R. § 155.605(d). HHS could broaden the hardship circumstances it recognizes, within the bounds of the current regulation. HHS has recognized additional hardships several times in the last few years, most recently last August. Also, anecdotal reports indicate that HHS’s view of applications claiming a non-listed hardship circumstance was more favorable in 2016 than it was in 2014. Case by case review is more consistent with the statutory and regulatory language than HHS’s initial, more limited approach. Expanded hardship exemptions can only go so far, though. A hardship exemption that effectively eliminates the penalty would conflict with Section 5000A.

There will certainly be legal debate over how far the Administration can go without a change in the law. The executive branch enjoys broad enforcement discretion, but that discretion is limited by the Constitution’s requirement that the President “take care that the Laws be faithfully executed.” (Art. II Sec. 3) Jonathan Adler’s essay discussing the limits of enforcement discretion is worth reading for those interested in this issue.

The Trump Administration may seek to rely on the Obama Administration’s delayed implementation of several ACA provisions (including the individual and employer mandates) as precedent allowing them to “waive, defer, grant exemptions from, or delay the implementation” of ACA provisions. Even if the Obama Administration’s implementation delays were lawful (which is debatable), it does not logically follow that a new Administration can “defer” or “delay” implementation of a provision three years after its actual implementation. This argument simply does not make sense for the individual shared responsibly provision or for premium tax credits. Not all provisions of the ACA have been fully implemented (such as the Cadillac Tax), and this argument may be more successful in those areas.

Given all the uncertainty, what can tax advisors and preparers do to help their clients?

First, no one should advise or assist a taxpayer to file a false tax return in the hopes that the law will not be enforced or will be changed at some future date. Even preparers who are not subject to Circular 230 face potential criminal charges under Section 7206(2) if they assist in the filing of a false tax return. Unhappy clients can be reminded that Congress passes the laws, and presidential executive orders do not change laws or regulations.

Taxpayers can file an extension if they prefer to wait and see whether Congressional or agency developments will affect their 2016 tax obligations.

Taxpayers who might qualify for a hardship exemption under the language of HHS’s regulation should be encouraged to apply. This is consistent with existing practice by consumer advocates. The regulatory language is broader than the specific hardship circumstances listed in guidance and on the healthcare.gov website. If an application is filed with HHS, a hardship exemption can be listed as “pending” on Form 8965.

The bottom line is that there are changes to come, but so far nothing has changed for tax year 2016 returns.

 

 

Is the Liability a Taxpayer Incurs under the Affordable Care Act for Failing to Obtain Health Insurance a Tax or a Penalty for Bankruptcy Purposes

Today we welcome back guest blogger Professor Bryan Camp of Texas Tech. Professor Camp writes today on the issue of the proper classification of the liability imposed for failure to obtain health insurance. The issue can apply to many excise taxes and has importance in the bankruptcy context.    

Before getting to Bryan’s post, I want to comment a misleading statement I made in the post last week entitled Bankruptcy Court Jurisdiction Over a Tax Claim. In that post I questioned the timing of the filing of their bankruptcy petition because I said they should have waited until three years had passed from the due date of the returns for all years. The issue has applicability to Bryan’s post and he gets it right. Thanks to Ken Weil for pointing out to me that if they filed a Chapter 13 plan and if they completed their plan there is no need to wait three years from the due date of the return to file bankruptcy if you seek to discharge a penalty. For debtors who complete a Chapter 13 plan, the discharge is covered by B.C. 1328(a). Prior to 2005, this provision gave what was called a superdischarge to debtors completing their Chapter 13 plans and made that chapter especially attractive to debtors with late filed returns, fraudulent returns and lots of other penalties. The changes in 2005 watered down the broad scope of the B.C. 1328(a) discharge but did not change the superdischarge of penalties. So, the timing of the bankruptcy vis a vis penalty discharge very much depends on the chapter of bankruptcy debtors choose and their ability to complete their Chapter 13 plan. Keith

Whether a debt is a tax or a penalty is not always easy to determine. The Supreme Court has weighed in on this topic twice, first in Sotelo v. United States, 436 U.S. 268 (1978)(in a case involving the trust fund recovery penalty) and then in United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996)(in a case involving the excise tax for failure to properly fund a pension plan). In each case the Court determined that the label in the statute did not match the true nature of the statute.

Whether a liability in the Internal Revenue Code is a tax or a penalty has importance in the treatment of the liability in bankruptcy cases. Taxes can rise above other unsecured claims and have priority status in the payout process. Penalties cannot have priority status as unsecured claims. The latest liability to raise issues concerning its status as a tax or a penalty is the liability for failing to obtain health insurance. The liability arises because the Affordable Care Act (ACA) seeks to have as many individuals enroll as possible to make the pool of insured individuals better. Internal IRS guidance directs its employees to categorized the ACA penalty as an “excise tax” for bankruptcy purposes. See IRM 5.9.4.18.1 (“The individual SRP liability will be treated as an excise tax under USC § 507 (a)(8)(E).”)

For the reasons discussed below the fold, I do not think the courts are likely to consider the ACA penalty an excise tax which can achieve priority status. They are more likely to classify it as a penalty which will become a general unsecured claim.

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First, the ACA calls it a penalty and not a “tax.”  IRC 5000A(g) provides that “the penalty provided by this section shall be…assessed and collected in the same manner as an assessable penalty under subchapter B or chapter 68.”  The Congressional decision to label this exaction a “penalty” and not a “tax” was a critical reason why the Supreme Court held that challenges to the penalty were not barred by the Anti-Injunction Act.  National Federation of Independent Business v. Sebelius, 132 S.Ct. 2566, 2582-3.  The Court found that, although the label did not matter for constitutional purposes, it did matter for purposes of figuring out the relationship of the ACA penalty with other statutes because statutes “are creatures of Congress’s own creation. How they relate to each other is up to Congress, and the best evidence of Congress’s intent is the statutory text.”  As in the NFIB case, here we have to figure out the relationship between the use of the work “tax” in the bankruptcy code and in the tax code.  Accordingly, the Congressional decision to label the payment as a penalty, and to direct that it be collected in the same manner as other assessable penalties, establishes a strong presumption that it is not a tax for purposes of other statutes, including the Bankruptcy Code.

Therefore, I don’t see a bankruptcy court treating the ACA as an excise tax or any other kind of tax.  I’m betting the IRS guidance is calling it an excise tax because section 5000A is in the excise tax chapter.  Theoretically, one might defend the penalty as an excise tax because it is imposed on taxpayers for engaging in certain transactions—or failing to engage in specified transactions, which is economically the same thing.  But I don’t see either of these two rationales for treating the ACA penalty as an excise tax as being very strong.

 

A good case to consider is In re Marcucci, 256 B.R. 685 (D. N.J. 2000), where the district court agreed with four bankruptcy courts that certain payments mandated by the State of New Jersey—payments quite similar in structure and purpose to the ACA penalty—were not excise taxes but were penalties.  In Marcucci, the court considered the character of a “motor vehicle surcharge” that New Jersey imposed on drivers who were considered high risk or convicted of certain traffic offenses.  These mandated payments to the state were to help the state fund a pool of money intended to even out the risk among all drivers.  The surcharges had been imposed by private insurers but the New Jersey legislature decided that the market was unfair and inefficient and so rather than indirectly regulating surcharges, decided to have the surcharge program administered by the DMV.   The state argued that these were excise taxes but the court disagreed.

The court first noted that “in cases where the Supreme Court has considered whether a particular exaction was a tax for bankruptcy purposes, the Court looked beyond the titular label given to the exaction and examined its actual operation” and “[t]he proper analysis therefore is to assess whether the attributes of the state’s claim, as provided by state law, fit the definition of a tax within the meaning of the Bankruptcy Code.”

The court then decided that the surcharge’s function was more like a penalty than a tax.  “In contrast to a neutral tax, the surcharge system is designed to deter poor driving habits. As discussed above, the legislative history of the Insurance Reform Act implies that the surcharges are intended to penalize “bad drivers”. That the surcharge system requires payment of outstanding surcharges before allowing a driver to return to the roadways should not be confused with a general tax imposed upon all drivers for the privilege of driving. A motor vehicle surcharge is not a generic exaction imposed to raise revenue for the government, but a penalty imposed as a result of specific motor vehicle violations. The State merely appropriates the monies obtained from specifically established assessments to fund the Merit Rating Plan.”  (internal quotes and citations omitted)

The NJ surcharge at issue in Marcucci is quite similar to the ACA shared responsibility payment.  The ACA penalty is imposed more as a consequence for violating the Individual Mandate (and, consequently, to encourage compliance) than to raise revenue.  See Jordan Barry and Bryan Camp, “Is the Individual Mandate Really Mandatory,” Tax Notes, June 25, 2012, p. 1633.

Second, however, just because the ACA penalty is not a tax does not automatically disqualify it from priority status.  Some penalties get priority status in bankruptcy and some do not.  Section 507(a)(8)(G) describes the kind of penalties that get priority status as “[a] penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.” The legislative history provides that such claims cannot be punitive in nature and that in regard to taxes such claims represent collection of the principal tax liability under the misnomer of a “penalty” See 124 Cong. Rec. H. at 11,096 and 11,113 (Sept. 28, 1978).  For this reason, these types of penalties are called “pecuniary loss penalties.”  All other penalties are nonpecuniary loss penalties and they are treated as general unsecured claims.

I think it likely that a bankruptcy court would consider the ACA penalty to be a nonpecuniary loss penalty.  First, note that the penalties described in 507(a)(8)(G) must be BOTH “related to” a tax described in paragraph (8), AND have the purpose of compensating the government for actual pecuniary loss.  The ACA penalty is sui generis.  It is simply not connected to any of the taxes described in paragraph 8.  Therefore, it cannot be a pecuniary loss penalty, even if it was, in some sense, designed to compensate the government for some pecuniary loss.  Further, I really do not see a court finding that the purpose of the penalty is to compensate for pecuniary loss.  The NJ state government made a bold attempt to convince the court in Marcucci that the surcharge imposed on bad drivers was

In addition to the priority issue I would be remiss to omit a word about dischargeability.  The starting point for discharge of non-priority tax penalties is governed by §523(a)(7).  Non-pecuniary loss penalties may not get priority status, but they also may not be discharged in bankruptcy if they arose within three years prior to the petition date.  The one exception to the 523(a)(7) rules are for debtors who successfully complete their Chapter 13 plans. They get a “super discharge” which, per §1328(a) includes an unqualified discharge of all non-pecuniary loss penalties. Chapter 13 debtors who fail to complete their plans, however, get the usual rules. §1328(b).

Here’s what the relevant part of §523(a)(7) provides:

A discharge…does not discharge an individual debtor from any debt-

 

***

 

(7) to the extent such a debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty-

 

(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or

 

(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition;

***

.

11 U.S.C. § 523(a)(7).

The Ninth Circuit did a nice job in parsing this forest of double negatives in McKay v. U.S., 957 F.2d 689 (9th Cir. 1992). Here’s that Court’s explanation,

Carefully parsed, the section initially makes nondischargeable a “debt that is for a fine, penalty or forfeiture payable to and for the benefit of a governmental unit.” Withdrawn from this class, however, are any such fines, penalties, or forfeitures that are “compensation for actual pecuniary loss.” These are dischargeable. The double negative, “does not discharge” and “not compensation for actual pecuniary loss,” accomplishes this end.

Another group of penalties are withdrawn from the nondischargeable group. These appear in parts (A) and (B) of § 523(a)(7). Part (A) withdraws tax penalties attributable to taxes which are not nondischargeable. That is, part (A) makes dischargeable tax penalties attributable to dischargeable taxes. This follows because part (A) relates “to a tax of a kind not specified in paragraph (1) of this subsection.” 11 U.S.C. § 523(a)(7)(A) (emphasis added). Those types specified in paragraph (1) are not dischargeable taxes. In relevant part “paragraph (1) of this subsection” makes not dischargeable “any debt” that is “for a tax … with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” 11 U.S.C. § 523(a)(1)(C).

The other group of penalties withdrawn from the nondischargeable group is described in part (B). It is quite straightforward. It makes dischargeable any tax penalty “imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.” A penalty imposed on unpaid taxes accruing more than three years before the filing of the bankruptcy petition is dischargeable.

Conclusion:

The bottom line for me is that bankruptcy courts will likely treat the ACA penalty as a general unsecured claim, which means it stands way back in the payout line. The trick is to be sure that the due date of any return that omits paying the ACA penalty is older than three years before the bankruptcy petition date unless your client is one of those rare debtors who successfully completes their Chapter 13 plan, and then they do not need to worry about that.

 

Review of the First Tax Year of the Affordable Care Act and Look Ahead: Part 3

Today we have the third and final installment of our review of the ACA in 2015 and preview of the ACA in 2016. Keith

Section 1411 Certifications

Employer liability for a shared responsibility payment is contingent upon receipt of a “Section 1411 Certification” relating to a full-time employee. See, I.R.C. §§ 4980H(a)(2), 4980H(b)(1)(B). The Section 1411 Certification notifies an employer that an employee received a subsidy through Section 36B or through an exchange. Subsidies include both PTCs and cost-sharing reductions (CSRs). Id. The statute places responsibility for the certifications on the Secretary of the U.S. Department of Health and Human Services (HHS) and the exchanges. See, Patient Protection and Affordable Care Act (ACA) § 1411(e)(4)(B)(iii), P.L. 111-148 (codified at 42 U.S.C. 18081(e)(4)(B)(iii). However, the exchange regulations provide that a “notice” will be sent by an exchange following an initial subsidy determination, and the official Section 1411 Certifications will be sent by the IRS. See, 45 C.F.R. § 155.310(h) & (i). Presumably, the IRS certifications will be sent following final determinations of PTC eligibility for a tax year.

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Exchanges will eventually begin sending notices to the employer of any employee who is granted APTC or cost-sharing subsidies. See, 45 C.F.R. § 155.310(h). These notices will advise the employer of their right to appeal the subsidy decision through the exchange. Id. The employer notice and appeal provisions have not yet been implemented, to my knowledge, by any exchange. The federal exchange intends to send employer notices beginning in 2016. See, CCIIO, Frequently Asked Questions Regarding The Federally-Facilitated Marketplace’s (FFM) 2016 Employer Notice Program (September 18, 2015), available at cms.gov/cciio. However, HHS recently proposed amendments to the rules governing employer notice, so it is possible that implementation will be postponed again. See, Notice of Proposed Rulemaking, Patient Protection and Affordable Care Act: Benefit and Payment Parameters for 2017 (publication scheduled for Dec. 2, 2015).

In addition to the exchange’s employer notice program, the Service will adopt procedures to certify to an employer that an employee received a PTC or CSR. See, 45 C.F.R. § 155.310(i); see also discussion at 79 Fed. Reg. 8566. The IRS has not yet issued any sub-regulatory guidance or procedures for Section 1411 Certifications.

Section 1411 is not a model of clarity. See, ACA § 1411(e)(4)(B)(iii) (codified at 42 U.S.C. 18081(e)(4)(B)(iii). Under the statute and current regulations, payment of a CSR can be sufficient to trigger an ESRP. Under 45 C.F.R. § 155.555(l), the outcome of an employer appeal can affect the employee’s eligibility for subsidies going forward. It is therefore somewhat puzzling that the federal government appears to be advising employers that the outcome of an exchange appeal will make no difference as to whether an ESRP will be owed. See, CCIIO, Frequently Asked Questions Regarding The Federally-Facilitated Marketplace’s (FFM) 2016 Employer Notice Program p. 1 (September 18, 2015), available at cms.gov/cciio (“The IRS will independently determine any liability for the employer shared responsibility payment without regard to whether the Marketplace issued a notice or the employer engaged in any appeals process.”); Decisions Employers Can Appeal, at healthcare.gov (“IMPORTANT: This appeal will NOT determine if an employer has to pay the fee.”).

On the other hand, it makes more sense to determine ESRP liability after tax returns and information returns have been filed for the year. Exchange appeals are not an exclusive remedy; additional appeals can be provided under subtitle F of the Code (Procedure and Administration). See, ACA § 1411(f)(2)(A) (codified at 42 U.S.C. 18081(f)(2)(A)). If employers could be held harmless for failing to appeal through an exchange, this would be preferable. Exchange appeals by employers could be frustrating and futile exercises on both sides. Exchange notices will be sent to all employers whose employees are granted subsidies, even those who are not in danger of owing an ESRP. Some employers may panic at an exchange notice and file an appeal, when in fact that employee’s receipt of a PTC does not subject them to an ESRP. An exchange will not know whether an employer is an ALE, or whether the employee is considered a full-time employee under Section 4980H. The exchange will not know whether the employer uses an affordability safe harbor or qualifies for Section 4980H transition relief.

It will be interesting to see whether any employer shared responsibility payments are assessed based on the receipt of CSR where the employee is ultimately determined ineligible for a PTC under Section 36B. There is no reconciliation for cost-sharing reductions, so the government has no opportunity to recoup erroneous CSR payments absent taxpayer misrepresentation or fraud.

ACA Section 1411 provides very limited exceptions to the strict confidentiality of tax information established by Section 6103. Employers may be frustrated with any appeal process because the employee’s tax return information cannot be disclosed, so the employer will not be able to fully understand or challenge the employee’s receipt of a subsidy. The exchange may release the employee’s name and whether the employee’s income is above or below the affordability threshold; nothing more is permitted without an employee waiver. See, ACA § 1411(f)(2)(B) (codified at 42 U.S.C. 18081(f)(2)(B)).

The Section 1411 Certification is of very high importance. The development of procedures around the Certification will be an important area to watch as implementation of the ACA continues in 2016. As employers start to be notified that workers have received a subsidy, education and training on the ACA’s protections for both employers and employees will be needed.

Worker Classification and ACA Protections from Employer Retaliation

Under Section 4980H, an employee’s receipt of a health insurance subsidy could cost their employer a substantial sum of money. Employees may be worried about getting their employers in trouble by applying for health insurance subsidies. Also, the ESRP provides another incentive for employers to misclassify employees as independent contractors.

Section 1558 of the ACA protects employees from retaliation for receiving a PTC, CSR, or for engaging in whistleblower conduct regarding any violation of Title I of the ACA. Title I of the ACA includes a variety of insurance market reforms, such as the prohibition against preexisting condition exclusions. This statute only protects employees. When advising taxpayers, LITCs should keep in mind the potential for misclassification and consider whether a misclassified taxpayer could be protected under Section 1558.

The Occupational Safety and Health Administration (OSHA) is tasked with enforcing ACA Section 1558. Interim final regulations were published in the Federal Register in 2013. 78 Fed. Reg. 13,222 (Feb. 27, 2013). OSHA has also published a short fact sheet summarizing the law and the complaint process.

If an employee believes his or her employer has violated Section 1558, the employee must file a written complaint with OSHA within 180 days of the retaliation. OSHA investigates complaints and may order a wide range of relief, including reinstatement, back pay, monetary damages, and legal fees.

It is possible to file a complaint online. The current complaint form does not include a checkbox for receipt of a PTC. Employees alleging retaliation on that basis would need to check “other” in response to question 25 on the complaint form.

A second whistleblower provision is located in the Code and predates the ACA. Section 7623 provides for whistleblower informant awards to individuals whose disclosures result in the assessment and collection of tax. An informant award can be between 15 and 30% of the amount collected, depending on several factors. The worker classification of the applicant does not affect eligibility.

It is possible that a worker who blows the whistle on misclassification of employees could seek an informant award under Section 7623 based on the subsequent collection of an ESRP. As discussed at several recent American Bar Association Tax Section meetings, relief from employment tax liability under Section 530 of the Revenue Act of 1978 (P.L. 95-600) does not affect a worker’s status under Section 4980H and does not affect any potential ESRP. See, discussion in preamble to final rule, Shared Responsibility for Employers Regarding Health Coverage, at 79 Fed. Reg. 8,567-8,568 (Feb. 12, 2014). Reclassification of workers for Section 4980H purposes could result in a substantial ESRP.

LITCs should be generally aware of the whistleblower provisions potentially available to taxpayers, and of the new potential consequences of a change in worker classification. Worker classification affects employer liability for the ESRP, and access to employer-sponsored insurance for employees impacts PTC eligibility. It also affects whether a worker is protected from retaliation under ACA Section 1558. It seems likely that most questions and problems about retaliation will revolve around workers receiving subsidies through an exchange. However, LITCs must also be aware of the broader health insurance and shared responsibility issues when advising a taxpayer, particularly if there is a potential worker classification issue.

Conclusion

The implementation of the ACA has come a long way in the last two years, but there is much that is still unknown. LITCs will be better prepared for controversy referrals and technical assistance inquiries if we are aware of the issues facing health care enrollment assisters. LITCs can provide crucial insight into the tax system for health care attorneys and assisters. LITCs can also be strong advocates for low-income taxpayers as IRS personnel and taxpayers alike are figuring out the law and the appropriate procedures.

Review of the First Tax Year of the Affordable Care Act and Look Ahead: Part 2

Yesterday, we began a look at the ACA by examining reconciliation issues. We continue to look at reconciliation issues today before moving on to information returns.  Keith

Reconciliation deadlines

The deadline to attest to reconciliation to receive APTC for January is December 15, 2015. This is the deadline to pick a January plan. See, 45 C.F.R. § 155.410(f)(2); see also, Dates & Deadlines for 2016 Health Insurance on healthcare.gov; FFM and FF-SHOP Enrollment Manual p. 13 (Oct. 1, 2015). So far, exchanges have indicated they will not extend this deadline, and no APTC will be paid for January if the attestation is made after that date. This is consistent with the regulations; exchange effective dates are almost always forward-looking. See, 45 C.F.R. §§ 155.310(f); 155.330(f). December 15 should be the deadline that practitioners emphasize to taxpayers who still need to reconcile 2014 APTC.

The exchange effective dates and the past-year reconciliation requirement only affect APTC eligibility. A taxpayer who qualifies under Section 36B may still receive a PTC for January (and other months in 2016) on his tax return. Section 36B does not include a prior-year reconciliation requirement.

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What happens if a taxpayer misses the December 15 deadline? I will walk through the consequences for a fictional taxpayer, David. If David has not been auto-enrolled in a 2016 plan, he has until January 31 to apply for 2016 coverage. He should not apply for coverage until he can attest to reconciliation. This scenario will mostly apply to people without a 2015 Qualified Health Plan (QHP), as most taxpayers with a 2015 plan will be auto-enrolled for 2016. See, CCIIO Bulletin 16: Guidance for Issuers on 2016 Reenrollment in the Federally-facilitated Marketplace (FFM), Aug. 25, 2015, available at cms.gov/cciio.

If David was auto-enrolled in a QHP for 2016, but the exchange data indicates that he did not reconcile 2014 APTC, he will receive a bill for his unsubsidized January premium. If David misses the December 15 deadline to attest to reconciliation, there are two main possible outcomes regarding David’s health insurance coverage and whether he can get APTC to help pay the premium.

Scenario 1: David pays the full January bill by the deadline.

In scenario 1, David has effectuated his 2016 QHP enrollment by making the first payment. See, 45 C.F.R. § 155.400(e). David can contact the exchange at any time to make a reconciliation attestation and request an APTC determination. Exchanges are required to redetermine eligibility for subsidies upon receipt of new information. 45 C.F.R. § 155.330(a). They are also required to process new applications at any time. 45 C.F.R. § 155.310(c).

If the exchange subsequently finds David eligible for subsidies, the effective date of the change (when David’s premium decreases) depends on when he contacted the exchange. David may need to pay full price for February and possibly later months as well, depending on when he attests to reconciliation. See, 45 C.F.R. § 155.330(f). For February APTC, the change must be reported by January 15. For March APTC, it must be reported by February 15, and so on. Id. State-based exchanges have some flexibility to set a later cutoff date. See, 45 C.F.R. § 155.330(f)(2).

Although David missed the deadline to get APTC for January 2016, he can still receive a PTC for January on his tax return. David has enrolled in qualifying health coverage and paid the premium. If he meets the other eligibility criteria he could receive a PTC at the end of the year.

Scenario 2: David does not pay his premium bill for January.

In this scenario, David’s 2016 QHP enrollment will be cancelled, because he did not pay his bill by the deadline. Health insurance issuers and exchanges have some flexibility to set the deadline. See, FFM and FF-SHOP Enrollment Manual pp. 18 – 19 (Oct. 1, 2014). However, there is no grace period permitted at the beginning of a plan year. See, FFM and FF-SHOP Enrollment Manual p. 19 (Oct. 1, 2015); 45 C.F.R. § 155.400(e). David can still apply for 2016 coverage during the open enrollment period and attest to reconciliation during the application process. The last day of open enrollment is January 31, 2016. David will have a gap in health insurance coverage for at least January and perhaps also February. See, Exhibit 4, Coverage Effective Dates for the 2016 FFMs OEP, FFM and FF-SHOP Enrollment Manual p. 13 (Oct. 1, 2015).

One potentially tricky aspect of this scenario is that David might have to wait until his 2016 auto-enrollment is cancelled before he can reapply. This will depend on the exchange processes. David needs to have his auto-enrollment cancelled in order to avoid owing the unsubsidized premium for January. The worst outcome for David would be for the exchange to process a Change of Circumstance rather than a new enrollment.

If an exchange processed a new application as a change of circumstance because David’s auto-enrollment had not yet been cancelled, then he would still owe the full unsubsidized premium for January. As discussed above, APTCs are not granted retroactively. Unless the situation were corrected, David’s 2016 insurance would eventually be terminated if he could not pay the unsubsidized premiums for the months before APTC became effective.

Under either scenario described above, David can call the exchange and attest to reconciliation as soon as his 2014 tax return is in the mail. It will be important to keep the exchange effective dates in mind when advising assisters and taxpayers about this, particularly leading up to the 15th of each month.

If QHP coverage is terminated outside of open enrollment, a taxpayer cannot reenroll in 2016 coverage without qualifying for a special enrollment period. 45 C.F.R. § 155.410(a)(2).

 

For most taxpayers who qualify for a PTC, exchange health plans are not affordable without subsidies. The lack of a grace period at the beginning of a plan year actually helps those taxpayers, because they have until January 31 to reconcile and reapply for coverage. Assisters and practitioners must keep in mind the prospective nature of APTC eligibility decisions, and take pains to help taxpayers avoid getting trapped by a bill for unsubsidized January coverage. As mentioned above, the deadline emphasized to taxpayers should be December 15 to avoid a gap in coverage and to avoid confusion regarding an auto-enrollment that needs to be cancelled.

2015 Information Returns

For tax year 2015, two new information returns will help the Service further implement both the Premium Tax Credit and the individual shared responsibility provision. Individuals who were enrolled in government-sponsored or private insurance coverage that is MEC will receive Form 1095-B from a government agency or health insurance company. See generally, I.R.C. § 6055; T.D. 9660, 79 Fed. Reg. 13220 (March 10, 2014); Information Reporting by Providers of Minimum Essential Coverage on irs.gov. In addition, individuals may receive Form 1095-C from a large employer. See generally, I.R.C. § 6056; T.D. 9661, 79 Fed. Reg. 13,231 (March 10, 2014); Information Reporting by Applicable Large Employers on irs.gov.

Form 1095-B is filed by government agencies sponsoring MEC, by private health insurance companies sponsoring MEC (including SHOP coverage but not individual QHPs), and by non-ALE employers who provide self-insured coverage. A substitute form may be used. Treas. Reg. § 1.6055-1(f)(2)(iii).

Form 1095-C is filed only by Applicable Large Employers (ALEs). An ALE for 2015 is generally an employer who averaged 50 or more full-time employees and full-time equivalent employees in 2014. See, I.R.C. § 4980H(c)(2) and Treas. Reg. § 54.4980H-1(a)(4). ALEs must file Form 1095-C to report any offer of health insurance coverage made to a full-time employee, or to report that no offer was made. There are several different codes that ALEs will use to indicate the type of health insurance that was offered, and other codes that identify the status of the employee in each month of the year. See, Instructions to Forms 1094-C and 1095-C. In addition, ALEs can use codes on Form 1095-C and 1094-C to claim transition relief, safe harbors, and other relief for situations in which the ALE is not subject to an ESRP for the employee. Id. ALEs who provide self-insured coverage must complete Part III of Form 1095-C in lieu of filing Form 1095-B as a health insurance issuer. See, Treas. Reg. § 1.6055-1(f)(2)(i).

Form 1095-C’s primary function is to enforce the employer shared responsibility provision. Because of this focus, the form will not always give an individual recipient all the information the recipient needs to determine his or her individual shared responsibility obligation or PTC eligibility. In addition, in certain situations the ALE may furnish a simplified statement to the employee, rather than provide a copy of Form 1095-C. See, Treas. Reg. § 301.6056-1(j)(1) (qualifying offer certification); 79 Fed. Reg. 13,241 (qualifying offer transition relief for 2015). The simplified statement provides even less information, and in some situations may be misleading or incorrect. This is discussed further below.

Both of the new forms are relevant to individuals who wish to claim a PTC. Either form could show that the recipient was eligible for MEC other than individual market coverage, thus disqualifying the recipient from the PTC. See, I.R.C. § 36B(c)(2). The new forms will also help the Service enforce both the individual and the employer shared responsibility provisions by documenting MEC coverage and ALE offers of coverage.

If Form 1095-B shows that an individual had coverage, the individual is probably not eligible for a PTC for that month. I.R.C. § 36B(c)(2). The main exception to this rule is for retroactively-granted Medicaid. See, Treas. Reg. § 1.36B-2(c)(2)(iv). Unfortunately, retroactively-granted Medicaid will be reported on the form the same way as prospectively-granted Medicaid. See, Form 1095-B instructions, example 2, p. 5. If the conflicting coverage is Medicaid, practitioners should investigate whether the taxpayer received retroactive coverage.

For 2015, duplicate coverage requiring repayment of APTC could be a significant problem. A recent U.S. Government Accountability Office report found that some individuals had overlapping APTC and Medicaid, and that government policies and procedures did not adequately prevent this from happening. GAO-16-73, Oct. 9, 2015. Duplicate coverage was not necessarily the beneficiary’s fault. To date the Service has not issued any systemic abatement policy regarding APTC repayment for individuals who unknowingly or unwillingly received APTC at the same time as other coverage.

As mentioned above, there are circumstances in which a large employer does not have to furnish Form 1095-C to its full-time employees. In those situations the employee may receive a simplified statement or a letter in place of Form 1095-C. See, Treas. Reg. § 301.6056-1(j)(1) (qualifying offer certification); 79 Fed. Reg. 13,241 (qualifying offer transition relief for 2015). A qualifying offer is an offer of MEC extended to a full-time employee and his or her spouse and dependents, which provides minimum value and has a premium for employee-only coverage not exceeding 9.5% of the U.S. mainland federal poverty line. See, Treas. Reg. § 301.6056-1(j)(1)(i). This is a slight simplification; for the complete slew of “ifs, ands, and buts” I refer the reader to the regulation.

If a qualifying offer was made for all 12 months of the year, the employee’s simplified statement will say that he or she (and his or her family) is not eligible for a PTC. See, Form 1095-C instructions, p. 7; 79 Fed. Reg. 13,241. However, the employer does not actually have all the information needed to determine this. The statement will be true in most cases, but not all. It might not be true if the employee, spouse, or dependent’s immigration status does not qualify him or her for Medicaid. In that situation, the taxpayer may qualify for a PTC despite having income under 100% of the federal poverty line. I.R.C. § 36B(c)(1)(B). The regulations’ preamble recognizes that a qualifying offer renders an employee and his or her family “generally ineligible” for the PTC, (79 Fed. Reg. at 13,241) but the qualifying term is omitted from the Form 1095-C instructions (see p. 7). This is worrisome, since tax preparers may not expect the substitute statement prescribed by the IRS instructions to be incorrect in some cases.

The ACA information reporting regulations are complicated and their completion for 2015 may be a struggle for some filers. For the 2015 tax year, the Service announced penalty relief for entities who file incomplete or incorrect Forms 1095-B or 1095-C. See, 79 Fed. Reg. at 13,226 (Mar. 10, 2014) (Section 6055 returns); 79 Fed. Reg. at 13,246 (Mar. 10, 2014) (Section 6056 returns). The returns must be timely filed and the filer must make a good faith effort to comply with the requirements of Sections 6055 and 6056. Id. Hopefully, large employers and MEC providers will do their best to report correct information and provide corrected forms when errors are brought to their attention. Penalties could be imposed for incorrect information returns if the issuer refuses to correct an error that is brought to its attention, as that would not indicate a good faith effort to comply with the information reporting requirements. See, Id.; see also Treas. Reg. §§ 1.6055-1(h); 301.6056-1(i).

Recipients of false information returns can sometimes sue for civil damages under Section 7434. However, that provision only applies to the nine information returns listed in I.R.C. § 6724(d)(1)(A). See, I.R.C. 7434(f). The information returns required by sections 6055, 6056, and 36B are not on the list.

Review of the First Tax Year of the Affordable Care Act and Look Ahead: Part 1

Today we welcome back Christine Speidel, an attorney with Vermont Legal Aid who directs the low income taxpayer clinic there. Christine has specialized over the past year in tax issues arising from the Affordable Care Act and co-authored a new chapter in “Effectively Representing Your Client before the IRS” on ACA issues.  Today we begin a three part series looking back and looking forward at the ACA.  The IRS has had a tough year in no small part due to the implementation of the ACA provisions.  While not without glitch, the IRS generally succeeded in integrating these provisions into the tax code.  As we approach the end of the year, Christine gives us a Janus like look at the ACA.  Keith

We all survived the rollout of the Affordable Care Act’s individual provisions in the last tax season. As the National Taxpayer Advocate recognized in her 2016 Fiscal Year Objectives Report to Congress, the 2015 tax season was largely successful. There were certainly bumps along the road, and it was a difficult tax season for a small minority of taxpayers, but the majority of taxpayers were unaffected by the new Affordable Care Act (ACA) provisions. It was also a relatively normal tax season for many Low Income Taxpayer Clinics (LITCs). LITCs are just starting to get into the examination, assessment and collection issues related to the 2014 Premium Tax Credit (PTC).

Taxpayers and practitioners will confront new challenges in 2016. Taxpayers who failed to reconcile their 2014 advance payments of the Premium Tax Credit (APTC) will not be eligible for APTC in 2016. New information returns will be filed for 2015, as the Internal Revenue Service continues to phase in the implementation of the shared responsibility provisions. As that implementation continues, LITCs will begin to see examination, assessment, and collection issues related to the individual shared responsibility payment. Finally, IRS enforcement of the employer shared responsibility provision could tempt some employers to retaliate against employees who claim a PTC, and employees may seek advice about the possible consequences of causing their employer to be liable for an employer shared responsibility payment (ESRP).

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APTC Reconciliation Issues

It’s open enrollment time again on the Health Insurance Marketplace. This is the third open enrollment period in which individuals can sign up for private health insurance plans and apply for subsidies to help pay for those plans. Open enrollment for the 2016 plan year runs from November 1, 2015, through January 31, 2016. See, Dates & Deadlines for 2016 Health Insurance on healthcare.gov.

Health Insurance Marketplaces are also known as health benefit exchanges. The U.S. Code, federal regulations, and formal guidance documents use the term “exchange,” so that is the term I will use in this article. The federal government uses the term “Marketplace” on websites and in publications for taxpayers. The terms are synonymous.

For the first time in the exchanges’ short history, individuals can be denied APTC for a new plan year on the basis of a failure to reconcile prior-year APTC. Reconciliation of prior-year APTC is a condition of APTC eligibility, 45 C.F.R. § 155.305(f)(4), but because tax returns are filed months after open enrollment, it takes nearly a full calendar year for the system to catch a failure to reconcile. Exchanges are currently making eligibility determinations for 2016 APTC. Taxpayers who received APTC in 2014 must have reconciled those payments in order to be found eligible for 2016.

What is reconciliation, and what is not?

One frequent question among health care assisters has been, “what does it mean to reconcile APTC”? A taxpayer applying for 2016 subsidies must answer the question, “…did you file a [2014] tax return and reconcile any premium tax credit you used?” See, application forms at marketplace.cms.gov. Strictly speaking, “reconciliation” means that an income tax return was filed, and the return included Form 8962, Premium Tax Credit, reporting the APTC received. See, id.; I.R.M. 21.6.3.4.2.16, Premium Tax Credit (10-01-2015); 45 C.F.R. § 155.305(f)(4). A pending examination of the PTC does not prevent a taxpayer from receiving APTC for 2016, as long as Form 8962 was filed with the return. However, the filing of an income tax return without Form 8962 could prevent a taxpayer from receiving APTC for the following year, depending on how IRS and HHS administer the reconciliation obligation. For 2016 enrollment, the government has reportedly taken a taxpayer-friendly approach to this question, requiring only that a 2014 tax return have been filed. This has not been formally announced, it is not reflected in the application questions, and it remains to be seen whether this approach will continue in future years.

Taxpayers do not have to have paid back any excess 2014 APTC in order to receive APTC for 2016. See, I.R.M. 21.6.3.4.2.16, Premium Tax Credit (10-01-2015); 45 C.F.R. § 155.305(f)(4). This makes practical sense because excess APTC is treated as additional income tax liability. I.R.C. § 36B(f)(2)(A). Its collection is not tracked separately by the IRS.

LITCs may soon begin to see situations in which IRS has assessed an erroneous liability related to APTC, including PTC audit reconsideration cases. Taxpayers should be reassured that controversies over the correct liability will not affect ongoing eligibility for APTC. If IRS has assessed tax liability based on a taxpayer’s 2014 APTC, that is sufficient reconciliation for 2016 APTC purposes, whether or not the liability is correct.

In some situations, exchanges may have data indicating that the taxpayer failed to reconcile when in fact that is not the case. This could happen if the taxpayer filed a return late in the year, especially if it was a paper return. Because the government recognizes that exchange data will lag behind reality, exchanges will accept an attestation that the applicant reconciled APTC. See, CMS Assister Newsletter, Oct. 14, 2015, section IV (on file with author). This is consistent with the general application processing regulations that require exchanges to provide subsidies based on an applicant’s attestation, pending resolution of an inconsistency. See, 45 C.F.R. § 155.315(f)(4). A question regarding APTC reconciliation has been added to the HealthCare.gov application forms. See, Application Forms for Individuals and Families at marketplace.cms.gov.

Some taxpayers may believe that they reconciled APTC when in fact they failed to file Form 8962, Premium Tax Credit. The IRS attempted to catch these cases on the front end by holding up the processing of tax returns which it identified as lacking a required From 8962. Taxpayers whose returns were held up received Letter 12C, Individual Return Incomplete for Processing, requesting Forms 8962 and 1095-A. See, I.R.M. 21.6.3.4.2.16.3 At-Filing Overview (10-01-2015). The IRS also sent out letters  last July (Letters 5591, 5591A, and 5596), delivering a warning to taxpayers who had failed to reconcile by that point.

Taxpayers who responded to a Letter 12C with a completed Form 8962 generally had their accounts adjusted. In some situations those taxpayers may have been told to file an amended return, in which case that would need to be filed before the taxpayer could receive APTC for 2016. See, I.R.M. 21.6.3.4.2.16.5, Premium Tax Credit Math Error Notice Responses (10-01-2015), paragraphs 4 and 6. Also, some taxpayers may have responded in ways that were not sufficient for IRS to reconcile APTC on their accounts, and mistakenly believed their response was sufficient. Several of these taxpayers contacted Vermont Legal Aid last summer after receiving an IRS letter. Perhaps because of the widespread confusion, taxpayers in this group reportedly will not be prevented from receiving APTC for 2016. However, the federal government could change this practice for future years and may be planning to do so. The government has not formally announced any leniency for 2016, perhaps because it would prefer that taxpayers actually reconcile APTC, and perhaps because it does not anticipate this leniency continuing next year. Taxpayers may learn during the 2017 enrollment process that their 2015 APTC was not actually “reconciled” according to IRS records. If IRS and HHS procedures change next year it will be important for those taxpayers to take corrective action before open enrollment ends.

Taxpayers who filed a 2014 return but failed to properly reconcile APTC should have a pending correspondence examination by this point. If a taxpayer realizes that he or she did not file Form 8962, the fastest way to fix it may be to file an amended tax return. Alternately, the taxpayer can attempt to resolve it through the examination process.

Summary Opinions for the Week Ending 8/21/15

We here at PT are huge fans of self-promotion, so I am thrilled to link Les’ recent article in The Tax Lawyer.   Les’ article, Academic Clinics: Benefitting Students, Taxpayers, and the Tax System, was published in the Tax Section’s 75th Anniversary Compendium – Role of Tax Section in Representing Underserved Taxpayers.  There are various other articles in the full publication that are worth reading (and hopefully will make you all feel guilty enough that you aren’t doing enough pro bono work to either cause you to assist some underserved folks or donate some money to those who are).

To the tax procedure:

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  • Hopping in the not-so-wayback-machine, in October of 2014, SumOp covered Albemarle Corp. v. US, where the Court of Federal Claims held that tax accruals related back to the original refund year under the “relation back doctrine” in a case dealing with the special statute of limitations for foreign tax credit cases.   As is often the case in SumOp, we did not delve too deeply into the issue, but I did link to a more robust write up.  It seems the taxpayers were not thrilled with the Court of Federal Claims and sought relief from the Federal Circuit.  Unfortunately for the taxpayer, the Fed Circuit sided with its robed brothers/sisters, and affirmed that the court lacked subject matter jurisdiction because the refund claim had not been made within the ten year limitations period under Section 6511(d)(3)(A).   This case deserves a few more lines.  The language in question states,  “the period shall be 10 years from the date prescribed  by law for filing the return for the year in which such taxes were actually paid or accrued.”   When the tax was paid or accrued is what generated the debate.

In the case, a Belgium subsidiary and its parent company, Albemarle entered into a transaction, which they erroneously thought was exempt from tax, so no Belgian tax was paid.  Years in question were ’97 through ‘01.  In 2002, Albemarle was assessed tax on aspects of the transaction in Belgium, and paid the tax that was due.   In 2009, Albemarle filed amended US returns seeking about $1.5MM in refunds due to the foreign tax credit for the Belgian tax.  Service granted for ’99 to ’01, but not ’97 or ’98 because those were outside the ten year statute for claims related to the foreign tax credit under Section 6511(d)(3)(A).  Albemarle claimed that the language “from the date…such taxes were actually…accrued” means the year in which the foreign tax liability was finalized, which would be 2002 instead of the year the tax originated.  Both the lower court and the Circuit Court found that the statute ran from the year of origin.  The Circuit Court came to this conclusion after a fairly lengthy discussion of what “accrue” and “actually” mean, plus a trip through the legislative history and various doctrines, including the “all events test”, the “contested tax doctrine”, and the “relation back” doctrine.  The Court found the “relation back” doctrine was key for this issue, which states the tax “is accruable for the taxable year to which it relates even though the taxpayer contests the liability therefor and such tax is not paid until a later year.” See Rev. Rul. 58-55.  This can result in a different accrual date for crediting the tax against US taxes under the “relation back” test and when the right to claim the credit arises, which is governed by the “contested tax” doctrine.

  • Prof. Andy Grewal, a past PT guest poster, has uploaded an article on SSRN entitled “King v. Burwell:  Where Were the Tax Professors?”  The post discusses possible reasons why tax professors largely did not enter the public debate on the merits of the legal arguments in King v. Burwell, and encourages them to be more active in future similar cases.
  • Another fairly technical issue was addressed in PMTA 2015-009, where the Service discussed interest netting when it is later determined that there was no original overpayment.  Under Section 6621(d), interest is wiped out if there equivalent overpayments to the taxpayer and underpayment to the Service.  The PMTA has a fair amount of analysis, but the issue and conclusion are a sufficient summary for our purposes.  Issues are:

(1) Whether an underpayment applied against an equivalent overlapping overpayment to obtain a net interest rate of zero pursuant to Section 6621(d) is available for netting against another equivalent overlapping overpayment if the Service determines the first overpayment was erroneous, (2) Whether the same is true for an overpayment netted against an erroneous underpayment, and (3) Whether the cause of the error affects these answers.

And concludes:

(1)  An underpayment that was previously netted against an equivalent overlapping overpayment is not available to net against another equivalent overpayment if the taxpayer has retained the benefit of the original interest netting (the interest differential amount paid or credited to the taxpayer). If, however, the taxpayer did not retain the benefit of the original netting, then the underpayment is available for netting against another overpayment. (2) The same analysis applies to an overpayment netted against an erroneous underpayment. (3) We are unaware of any circumstance where the cause of the error would change our answers.

  • I haven’t highlighted Prof. Jim Maule’s blog, MauledAgain, in a while, which is a failing on my part.    Here you will find Prof. Maule’s post on tax fraud in the People’s Court and if you scroll down on this page you will find an update to the case.  Two schmohawks agreed to commit tax fraud by transferring the value of a child tax credit.  The plan fell apart, and one sued the other in People’s Court to enforce the “contract” between the co-conspirators.  The Judge dismissed the case because fraudulent contracts are not enforced.  Prof. Maule quotes from the show, where the plaintiff said, “What about pain and suffering?”  Stole my line.
  • TIGTA has released a report about Appeals penalty abatement decisions, and it isn’t great.  First, it isn’t great because, as the report concludes, Appeals is not adequately explaining its abatement decisions.  I agree Appeals should indicate why it is abating penalties, but I do not agree with the second conclusion, which is that Appeals is leaving money on the table.  Meaning, it should not be waiving those penalties.  TIGTA reports that an additional $34MM could have been collected on the abated penalties.  It also reported that many cases were inappropriately considered by Appeals because Compliance had not reviewed the abatement.  Given that penalties are essentially applied to every underpayment, with no consideration to whether the taxpayer reasonably attempted to comply, it seems inappropriate to assume those penalties are all collectible (or to encourage Appeals to abate less).
  • On Jack Townsend’s Federal Tax Procedure Blog is a discussion of the tax perjury case, US v. Boitano (What would Brian Boitano do?  Not perjure himself in a tax filing, that is for darn sure.  This is Steve Boitano- presumably not related to the super hero/figure skater).  Questions presented in the case were whether filing a document was required under Section 7206(1) for perjury, and what constituted filing.  In Boitano, the taxpayer provided returns to an agent who was not authorized to accept filed returns.  Agent realized the returns were questionable and never forwarded to appropriate Service employee for filing.  The 9th Circuit held filing was required (not stated in statute), and giving the return to the agent did not constitute filing.  Therefore, no crime under Section 7206(1).
  • Like Thor’s mighty hammer, the IRS has slammed down the tax law upon Marvel, and not even its super team of Avenger like lawyers could provide a  Shield (select from Captain America’s, or Agents of) from the consequences.  The Tax Court has decided the hulking consolidated group of the Marvel universe was required to offset its net operating loss by the cancellation of debt  income, and could be applied against the NOL of one member of the consolidated group.   I’ll touch on the holding below in broad strokes and I’ll stop trying to incorporate Marvel superheroes, but what I found most interesting about this case is that it arose out of the 1996 Chapter 11 Bankruptcy of Marvel, which seems to just print money with its movies now.  I had completely forgotten also that two real life titans (of industry) got in dustup in ’96 about that bankruptcy, Ronald Perelman and Carl Icahn.  You can read more about the amazing twenty year turn around here and here.   That story is more interesting than the law in this one.  Under Section 108(a), discharge of indebtedness income is not included as income if the discharge is pursuant to a Chapter 11 bankruptcy.  The excluded income reduces certain other tax attributes in certain circumstances, including a reduction of NOLs that carryover from prior years.  See 108(b)(1)(2).  Marvel’s subsidiary only reduced the carryover for the subsidiaries  in Chapter 11, and not the parent group that filed consolidated returns with the subs.  The Tax Court found that the aggregate approach was required, and the COD income had to reduce the NOLs of the consolidated full group.  I’ve glossed over the analysis, which is worthwhile if you have this specific type of issue.

 

 

 

Summary Opinions for May, part 1

May got away from me, and so has much of June.  I’ll post the Summary Opinions for May in two parts, and handle June in the same manner.  Below are some of the tax procedure items in May that we didn’t otherwise cover:

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  • The Middle District of Louisiana, after the Fifth Circuit vacated and remanded the case, reversed its prior decision and, under Woods, held that the Section 6662(e) valuation misstatement penalty could be imposed when the underlying transaction had been determined to lack economic substance. Chemtech Royalty Associates, LP v. US.   This case was the result of some crazy tax planning by Dow Chemicals to goose its basis in a chemical plant.  Here is Jack Townsend’s prior coverage of the case.
  • Sticking with substantial valuation misstatement penalty, the Tax Court in Hughes v. Comm’r upheld the penalty against a KPMG partner who claimed a step up in basis in stock when he transferred the shares to his non-resident spouse.  This was based on some informal tax research, and conversations with some co-workers that were also informal.  The Court essentially felt Mr. Hughes should have known better, and tagged him with a big penalty (probably didn’t help he was transferring the shares to try and ensure his ex-wife couldn’t make a claim for the increase in value).
  • IRS has released Chief Counsel Advice regarding abatement of paid tax liabilities.  In taxpayer friendly advice, CCA 201520010 states the language of Section 6404(a) is “permissive” and does not require the liability to be outstanding.  That Section states the “IRS is authorized to abate the unpaid portions of the assessment of any tax or any liability in respect thereor…”  The reference to “unpaid”, according to the CCA, is not binding on the Service.
  • The Service has released CCA 201519029, which provides advice on when preparer penalties can apply in situations where the prepared didn’t sign the return or didn’t file the return, and when a refund claim was made after the statute had expired.  For the third situation, the Service stated that “understatement of liability” does not include claims barred by the statute.  The full conclusions in the CCA are:

Issue 1: Yes. If the return is not filed, a penalty under I.R.C. § 6694(b) may be assessed if the return preparer signed the return and the return preparer’s conduct was willful or reckless.

Issue 2: Yes. Under the language of I.R.C. § 6694(b)(1), the return preparer penalty may be assessed if the tax return preparer prepares any return or claim for refund with respect to which any part of an understatement of liability is due to willful or reckless conduct. There is no requirement that the Service allow the amounts claimed on an amended return before the I.R.C. § 6695(b) penalty may be assessed.

Issue 3. The penalties under I.R.C. §§ 6694(a), 6694(b) or 6701 should not be assessed merely because the return preparer made and filed a claim for refund after the period of limitations for refunds had expired, because an “understatement of liability” does not include claims that are barred by the period of limitations. In addition, there may be extenuating circumstances that weigh against asserting the penalty. The amended return, for example, may be perfecting an earlier timely informal claim for refund.

  • The Service has announced it will be refunding the registered tax return preparer test fees.  There will be a second refund procedure where you can request your time back…but it will be ignored.
  • Professor Andy Grewal in early May had an excellent blog post on Yale’s administrative law blog, Notice and Comment, which highlights more potential penalties on employers attempting to follow the ACA requirements.
  • Another CCA (CCA 201520005) , where the IRS has held that the deficiency procedures apply to the assessment of the penalty under Section 6676 to erroneous refund claims based on Section 25A(i) American Opportunity Credit, since the penalty can only apply to a refund claim based on the credit if that claimed credit is part of a deficiency.  Carlton Smith previously had a blog post touching on this issue, found here, where he persuasively criticized  this position.  You should check out the entire post, but I’ve recreated a portion below:

A third issue discussed by the PMTA is how the section 6676 penalty is to be assessed.  Frankly, I read the Code as providing that the assessment is done like a section 6672 responsible person trust fund penalty — straight to assessment, without the deficiency procedures applying.  That seems to be what section 6671 provides.  But, the PMTA takes the position that only for underlying issues on which the section 6676 penalty applies where there is no jurisdiction in the Tax Court under the deficiency procedures, such as for excessive refund claims regarding employment taxes or the section 6707A reportable transaction penalty, the section 6676 penalty is done by straight assessment, without prior notice to taxpayers.  However, for section 6676 penalties on what would constitute a “deficiency” — and excessive refundable credit claims are clearly part of a deficiency under section 6211(b)(4)‘s special rules — the PMTA concludes that the section 6676 penalty should be asserted in a notice of deficiency.  The PMTA reasons that Tax Court cases have in the past held that a penalty which is computed as a function of a deficiency (which I would point out includes extra late-filing and late-payment penalties on the tax deficiency) are also treated under the deficiency procedures.  This reasoning is all mixed up.  The Tax Court applies the deficiency procedures to penalties like the late-filing and late-payment penalties of section 6651(a) that are imposed on the tax deficiency only because of special language in section 6665(b) that directs the Tax Court to do so.  There is no similar language in section 6671 directing deficiency procedures to apply to any penalties imposed in the following sections.

  • And another CCA (201517005), this one dealing with the statute of limitations for refunds based on foreign taxes deducted.  Specifically, whether a refund claim more than ten years (yr 13) after the tax year in question (yr 2) was timely when it resulted from an NOL (yr 4) where the taxpayer elected to deduct foreign taxes paid instead of taking foreign tax credit.  The IRS concluded that no, Section 6511(d)(2) applied to the NOL and required the claim to be made three years after the NOL year.  Section 6511(d)(3), which allows for a ten year statute for refunds pertaining to foreign tax credits, was not applicable.
  • Apparently, some states are starting to scale back the amount of tax credits available for movie productions.  Two years ago, The Suspect was filed in my building, staring Mekhi Phifer and no one else you have ever heard of.  I think it was “catered” by a fast food joint, and they may have been using our coffee pots to make coffee.  I can’t imagine Pennsylvania dropped the big bucks to land that film.
  • Emancipation day is throwing off filings again next year.  I always assumed that had something to do with the date of the Emancipation Proclamation, but I was wrong. The Emancipation Proclamation went into effect January 1st, 1863.  On April 16th, 1862, President Lincoln signed the Compensated Emancipation Act, freeing the enslaved living in the District of Columbia.  The linked Rev. Ruling explains what those in Massachusetts who are celebrating Boston Marathon Day (Patriots Day-celebrating the shot heard round the world) should do also.
  • Initially when writing this, I was watching the US women’s national team take it to Colombia, and recalling what a jackass Sepp Blatter has been.  Hoping this article is in reference to the shoe dropping on him next.  Even if he didn’t evade taxes, he should have to pay someone money for suggesting he would boost viewership of the women’s game with hot pants.  Or for not knowing who Alex Morgan is…or for making the women play on turf.