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.


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 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 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.


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 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.



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.


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 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 (“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 (“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.


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; 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.


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

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 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

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).


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

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 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., 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., 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 application forms. See, Application Forms for Individuals and Families at

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. 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., 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.

Penalty Relief and Premium Tax Credit Reconciliation

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.  Keith

This is the first tax season that people who received advance payments of the Premium Tax Credit (APTC) must reconcile those payments on their federal income tax returns. APTC was paid during 2014 based on a person’s projected 2014 income (and other eligibility criteria), which may have been estimated as early as October 2013. Not surprisingly, many people are discovering that they received too much APTC or do not qualify for a Premium Tax Credit (PTC) at all, and they are having to repay all or a portion of it with their tax return. As of late February, H&R Block announced that fifty-two percent of its clients who received APTC had to repay a portion of the subsidy.

Taxpayers who have a balance due because of APTC reconciliation do get some relief. In Notice 2015-09 (IRB 2015-6, 2/9/15), the IRS announced limited penalty relief for 2014 only, for taxpayers who have a balance due as a result of excess APTC. However, Notice 2015-09 imposes several conditions that must be met for penalty relief to be granted. It also sets out procedural hurdles that will be difficult for some taxpayers to overcome.

The rationale behind the penalty relief for taxpayers with excess APTC is not fully set out in the Notice. However, some exchanges made erroneous APTC determinations in 2014 amid technological and operational difficulties. Also, many consumers did not understand how APTC worked. This issue was described in a recent New York Times article. The penalty relief is provided under the authority of Sections 6651(a)(2) and 6654(e)(3).  Thus, one could say that Notice 2014-09 amounts to a blanket finding of reasonable cause for late payment, and a concession that the imposition of the estimated tax penalty would be against equity and good conscience. (There are also administrative penalty waivers such as First Time Abate.)

This post will describe the penalty relief available under Notice 2015-09 and some of the barriers that may prevent low-income taxpayers from accessing the relief. I will then offer some thoughts on improvements that could be made.


Relief under Notice 2015-09


Notice 2015-09 provides relief from two penalty provisions: the penalty imposed by Section 6651(a)(2) for late payment of a balance due, and the penalty under Section 6654(a) for underpayment of estimated tax. Unfortunately, relief is not automatically applied to qualifying accounts, and relief from both penalties cannot be requested at one go.

The substantive criteria for relief are the same for both penalties. The penalties will be abated if a 2014 balance due was caused by APTC and: (1) the taxpayer filed a timely 2014 return (including by a properly extended due date); (2) the return reports excess APTC; (3) the taxpayer is current in all tax filing and payment obligations; (4) if the 2014 tax return was filed after 4/15/15, the taxpayer paid the balance due by 4/15/16; and (5) the taxpayer has requested relief. (See Notice 2015-09 at pages 4-5, and also Publication 974 (Mar. 2015) at page 8.)

Taxpayers will be considered current in their tax filing obligations if they “have filed, or filed an extension for, all currently required federal tax returns.” (Notice 2015-09 at page 5.) More controversial (in the LITC community at least) is likely to be the Notice’s definition of when a taxpayer is considered current in their payment obligations. If a taxpayer has any outstanding balances, the taxpayer must either have a current installment agreement or have entered into an offer in compromise. A taxpayer will also be considered in compliance if a “genuine dispute” is pending regarding the existence or the amount of a liability, so long as the liability has not been “finally determined.” (Notice 2015-09 at page 5). This definition of compliance will exclude many LITC clients from relief.

There are distinct procedures to request relief from each penalty. For the late payment penalty (known as the Failure to Pay or FTP penalty), relief is not requested with the tax return. Rather, the taxpayer must respond in writing to the IRS notice demanding payment of the balance (and charging penalties and interest). The taxpayer’s letter must request relief under Notice 2015-09 specifically. (See Notice 2015-09 at page 6.) In all cases, it seems the IRS will impose the FTP penalty before abating it.

There is a different procedure for requesting waiver of the estimated tax penalty. According to Notice 2015-09, “taxpayers should check box A in Part II of Form 2210, complete page 1 of the form, and include the form with their return, along with the statement: ‘Received excess advance payment of the premium tax credit.’” (p. 6) Theoretically at least, this penalty should never be assessed against taxpayers who qualify for relief.

Barriers to Relief


Two substantive restrictions on eligibility for penalty relief will bar deserving taxpayers from accessing relief. First, the narrow definition of compliance excludes many taxpayers, including people who have prior-year IRS debts in Currently Not Collectible status due to disability, unemployment or other hardship. Second, taxpayers who timely file a 2014 return after 4/15/15 are denied relief unless they pay off their balance by 4/15/16. There is no consideration given to the reason why the taxpayer filed under extension.

The complexity of the procedures for requesting relief is also worrisome. Notice 2015-09 was issued after the filing season had started, and well after most tax professionals had completed their annual continuing education courses. People are not likely to request relief from the estimated tax penalty unless prompted to do so by their preparer or software. I question whether the unrepresented low-income taxpayer population will be able to follow the procedures required to obtain relief from the FTP penalty (or even know to look them up). LITC practitioners will need to review future clients for this issue and request penalty relief for taxpayers when appropriate.

Broader context and ideas for improvement


Some of Notice 2015-09’s restrictions on eligibility for relief are puzzling given the circumstances that the policy is presumably intended to address. The procedural requirements mean that many people will not benefit from it even though they qualify. Other people will not qualify even though their 2014 circumstances relating to APTC are just as compelling.

Penalties should be administered with the goal of improving tax compliance. The IRS takes this approach in Policy Statement 20-1, found at IRM (06-29-2004). Compliance is improved when people believe that the system is fair. (See the National Taxpayer Advocate 2014 Annual Report to Congress, MSP#8, especially pp. 100-101 and n. 47.) One component of fairness is a rational relationship between the problem and the solution.

With all that in mind, there are three things that should be improved about APTC penalty relief.

First, the IRS should not penalize taxpayers who file under extension. There is no rationale given for requiring someone who timely files pursuant to an extension to finish paying the debt by 4/15/16, while imposing no such requirement on someone who timely files on 4/15/15. This requirement will entirely exclude some taxpayers from relief, without good reason.

Some people may not file by 4/15/15 because they still have not received correct 1095-A forms. I have two clients in that situation currently. It is possible that the forms will not arrive before 4/15. Treasury directs taxpayers who know that corrected forms are pending to wait and file their return when the corrected form arrives. (March 20, 2015 press release and accompanying FAQs.) In Notice 2015-30 (scheduled to appear in IRB 2015-17 on April 27), Treasury issued guidance extending penalty relief to taxpayers who are affected by a delayed or incorrect Form 1095-A. (Notice 2015-30 merits its own post and will not be discussed in detail here.) This is a good step, but it does not go far enough. There are other valid reasons for a taxpayer to file on extension. For example, Joe Kristan recently explained why K-1s are often filed as late as September 15.

It makes sense to encourage taxpayers to file timely returns, including by the extended deadline. However, I question whether restricting APTC penalty relief will actually prevent any late filed returns. Also, some of the other restrictions on relief do not seem to have a policy basis other than reluctance to extend any relief to “bad” taxpayers.

Not everyone will be able to repay their APTC promptly. I know of one Vermont taxpayer who must repay over $11,000 in APTC due to a change in circumstances that he did not realize he should report to the exchange. Just because a taxpayer’s 2014 AGI was over 400% of the poverty line, and thus they are ineligible for APTC repayment caps, that does not mean the taxpayer has plenty of cash now. For my clients, AGI is often inflated by cancelled debt. Many of my taxpayers have also taken lump sum retirement distributions that were withdrawn and used for a specific purpose well before tax time.

Second, a prior-year clean slate should not be a necessary condition before one can find that a taxpayer deserves relief from penalties caused by 2014 APTC reconciliation. If this penalty relief policy were permanent rather than applicable only to 2014, it would make more sense to take prior year compliance into account. The government certainly does not want to see taxpayers with significant, unpaid, or late-paid excess APTC year after year. It might slightly encourage taxpayers to gamble or even intentionally try to receive more APTC than they should if penalty relief were available every year. In the first year of this program, however, whether taxpayers have unresolved/unpaid prior-year liabilities does not seem particularly important to the question of whether they deserve relief from APTC-related penalties for 2014.

In general, prior-year compliance is not a requirement for reasonable cause penalty relief. Rather, it is one factor that the IRS considers in determining whether the taxpayer exercised ordinary business care and prudence. See IRM Requesting Penalty Relief (11-25-2011), #6. And that makes sense. The IRS should consider priory-ear compliance in the same way for APTC penalty relief.

The Service could at least specify some CNC closing codes that would be acceptable for purposes of qualifying for relief under Notice 2015-09. Taxpayers who are uncollectible due to residence in a foreign country need not be treated the same as taxpayers who are uncollectible due to unemployment or disability. (See table of CNC closing codes in IRM Currently Not Collectible Procedures (1-1-15)).

Third, the procedural complexity is worrisome. The NTA and other stakeholders have repeatedly criticized IRS for its tendency to impose penalties automatically and correct them later. See the National Taxpayer Advocate 2014 Annual Report to Congress, MSP#8, especially notes 26-33 and accompanying text on pages 97-98. The National Taxpayer Advocate’s 2014 Annual Report to Congress highlighted the IRS penalty regime as Most Serious Problem #8.

Generally, failure-to-file and failure-to-pay penalty relief may be requested in writing or over the phone. The Internal Revenue Manual (IRM) allows consideration of oral requests under reasonable cause or FTA. See IRM (08-05-2014), Unsigned or Oral Requests for Penalty Relief. This section does not currently encompass relief under Notice 2015-09. Relief from estimated tax penalties is not included at all in current oral waiver authority; a signed written request must be submitted. See IRM, #6 (08-05-2014).



When an individual owes tax to the IRS, several different penalty provisions of the Internal Revenue Code (IRC) may come into play. The penalty and interest provisions of the IRC often confound the taxpayers I work with. Many unsophisticated taxpayers are afraid to file a tax return showing a balance due. They frequently fail to understand how important a timely-filed return is.

Penalty relief that must be specifically requested by the taxpayer is less effective than a blanket policy that is automatically applied by the IRS. This is particularly the case for relief that must be requested in writing.

Taxpayers have the right to a fair and just tax system. (IRS Pub. 1) APTC penalty relief should be simplified substantively and procedurally so that it actually reaches the deserving taxpayers for whom it was designed. The penalty relief provided in Notice 2015-09 is a welcome step. But the Notice does not go far enough to help taxpayers confused by a new system. Penalties only promote tax compliance when they are administered in a way that is perceived as fair.


ACA and Tax Procedure: Many Unanswered Questions Still Exist

In today’s guest post we welcome Christine Speidel. Ms. Speidel is an attorney with the Vermont Low Income Taxpayer Project 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 will co-author, with Tamara Borland of Iowa Legal Aid, a new chapter on the Affordable Care Act in the upcoming 6th Edition of “Effectively Representing Your Client before the IRS.” Les

Two major tax code sections created by the Affordable Care Act took effect this year. First, Section 5000A provides that individuals must either have health insurance that is “minimum essential coverage,” have an exemption from the requirement to have coverage, or make a shared responsibility payment with their income tax return. Second, Section 36B makes an advanceable and refundable credit available to certain taxpayers to offset the cost of individual market health insurance obtained through the ACA’s affordable insurance exchanges. I will outline the procedures for assessment and collection of the 5000A payment. Then I will briefly outline the procedures for assessing and collecting overpayments of the 36B premium tax credit.


The individual shared responsibility payment is colloquially known as the “ACA penalty.” The Service is restricted from treating the penalty like any other tax debt. Although the penalty is to be “assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68.” (Section 5000A(g)(1)) the Service may not employ criminal penalties, criminal prosecutions, the Notice of Federal Tax Lien, or levy procedures to collect the penalty. Section 5000A(g)(2). The ban on levy procedures encompasses many programs employed in the general course of tax collection, including the State Income Tax Levy Program and the Federal Payment Levy Program.

While a Notice of Federal Tax Lien (NFTL) may not be filed based on a Section 5000A assessment, the “secret” statutory lien that applies to all tax debts will still arise and attach to all property of the taxpayer under Section 6321. The secret lien could potentially be foreclosed in federal district court pursuant to Section 7403, but the Service will not have the benefit of any priority status that would have been conferred by a NFTL.

Collection of the ACA penalty is expected to occur largely through voluntary payments and refund offsets. Refund offsets are possible, despite the ACA’s prohibition on levies, because the application of an overpayment to a tax liability pursuant to Section 6402(a) is technically not a levy. Perry v. Comm’r, T.C. Memo. 2010-219, and cases cited. See also discussion in the National Taxpayer Advocate’s 2011 Annual Report to Congress, p. 598 (noting that legislation could be helpful to curb inappropriate uses of the Service’s offset authority).

It remains to be seen how the Service will implement the restrictions on its collection powers. For example, the penalty may need to be tracked on its own account transcript. If the penalty is not included on the 1040 account transcript, taxpayers’ representatives will presumably need to identify the penalty as a separate matter on the Power of Attorney (Form 2848).

As an excise tax, the ACA penalty will be subject to the 3 year assessment statute of limitations of Section 6501(a). It is an excise tax because Section 5000A can be understood as imposing an indirect tax on the condition of not having health insurance. Nat’l Fed. Indep. Bus. v. Sebelius, 132 S.Ct. 2566, 2599-2600 (2012). Section 5000A is located in chapter 48, subtitle D of the Internal Revenue Code. Subtitle D is titled Miscellaneous Excise Taxes. If the penalty is underreported by more than 25 percent of the reported penalty, the limitations period is 6 years under Section 6501(e)(3). There is no limitations period at all in the case of fraud or a willful attempt to defeat or evade the penalty, or a failure to file a return. Section 6501(c)(1)(2)&(3).

We do not yet know what the Service’s assessment procedures will be for the ACA penalty. Nothing in the Affordable Care Act or subsequent amendments limits the IRS’s assessment authority with respect to the penalty. Third party information returns filed under Sections 6055 and 6056 will aid the Service in its assessment efforts. Taxpayers have no right to Tax Court deficiency procedures prior to assessment of the ACA penalty. See Section 6211(a), definition of a deficiency. The Service could voluntarily create a pre-assessment administrative review process. This seems advisable as a matter of fairness and political expediency. Many taxpayers will not be able to afford paying the penalty and then filing a refund suit.

In many ways it would make sense, and promote administrative simplicity, for the ACA penalty to be subject to the same assessment procedures as an individual income tax liability. The ACA penalty is to be included on the individual income tax return. Section 5000A(b)(2). More importantly, calculation of the penalty is based on the income, health insurance status, and exemption status of the taxpayer(s) and their dependents.

Automated adjustments, examinations, and Tax Court deficiency litigation frequently involve items of income or whether a person qualifies as the taxpayer’s dependent. Health insurance status could be at issue in a proposed disallowance of the Health Insurance Premium Tax Credit (which is subject to deficiency procedures). The ACA penalty may be implicated by the outcome of these processes. It might be simpler and less confusing for taxpayers if proposed adjustments to the ACA penalty were included with notice of other proposed adjustments to a tax return. However, once a petition is filed in Tax Court, any ACA penalty issues will have to be separated because they are beyond the court’s jurisdiction.

We also do not yet know what procedures the Service will use to collect the ACA penalty. As with the assessment issues just discussed, in some areas the Service has very few restrictions placed on it. For example, because liens and levies may not be used to collect the penalty, the collection due process rights associated with liens and levies do not apply. The Service is not legally obligated to provide the rights conferred by sections 6330 and 6331 when employing its offset authority. Boyd v. Comm’r, 451 F.3d 8 (1st Cir. 2006). As a matter of fair and efficient tax administration, though, it may choose to provide for post-assessment administrative review.

The general collection statute expiration date (CSED) under Section 6502 should apply to collection of the ACA penalty. It has been suggested that there is no CSED with respect to refund offsets under Section 6402(a), because Section 6502(a) only explicitly limits levies and proceedings in court. ((See Ajay Gupta, ACA Penalty: Toothless? Hardly! Corporate Raiders Fare Better, 141 Tax Notes 877 (Nov. 25, 2013)). This is contrary to the Service’s current practice, and would be a fundamental change in collection policy. See IRM, Refund Offset Research (10/1/2013), Note following #3 (requiring consideration of the CSED “in all cases.”). Section 6402(a) explicitly refers to “the applicable period of limitations”. Section 6401(a) of the Code also provides that the term ‘overpayment’ includes a payment of any internal revenue tax that is “collected after the expiration of the period of limitation properly applicable thereto.” In Program Management Technical Advice 2011-035, the Service has noted: “Although the phrase any liability in respect of an internal revenue tax is not defined in the statute, it has long been the Service’s position that a tax liability which could be enforced through normal assessment and collection procedures … is a prerequisite for making an offset under section 6402. See Treas. Reg. section 301.6402-1.”

If the ACA penalty is not timely paid, late payment penalties may be imposed under Section 6651(a)(3). Interest may be imposed under Section 6601, although interest will not begin to run until assessment. Section 6601(e)(2)(A). This is a result of Congress having specified that the ACA penalty is to be collected in the same manner as an assessable penalty located in subchapter B of chapter 68 of the Code.

The Service has stated that the 6662 accuracy-related penalty does not apply to the shared responsibility payment. 78 FR at 53655 (Aug. 30, 2013). The Service reasoned, “The section 5000A shared responsibility payment is not taken into consideration in determining whether there is an underpayment of tax under section 6664. Therefore, the shared responsibility payment is not taken into account under section 6662.” It is not clear how this conclusion was reached: the section 6662 penalty applies to underpayments of tax as defined in section 6664, and section 6664 refers to “any tax imposed by this title.” For Constitutional purposes, the ACA penalty is a tax, imposed by Title 26 of the U.S. Code. However, even if the Service changes its interpretation of section 6664, any accuracy-related penalty would at least have to be based on negligence or disregard of the rules. Section 6662(b)(1). The “substantial understatement” penalty under section 6662(b)(2) only applies to income tax.

The Service has not yet released forms, instructions, detailed publications, IRM provisions, or much guidance regarding assessment and collection of the ACA penalty. There are significant uncertainties at this point regarding the practical implementation of section 5000A.

Assessment and collection of Premium Tax Credit overpayments

In contrast to the individual shared responsibility payment, the Health Insurance Premium Tax Credit (PTC) fits readily into the Service’s existing assessment and collection procedures. The PTC is a new refundable credit, and it is treated for assessment and collection purposes like the existing refundable credits. PTC is available in advance or may be claimed on a tax return.

Anyone who receives advance PTC payments (APTC) must file a tax return to reconcile the advance payments with the PTC actually due to the taxpayer. Treas. Reg. § 1.36B-4. Excess advance payments are treated as additional income tax liability. Section 36B(f)(2); Treas. Reg. § 1.36B-4(a)(1)(i). PTC not taken in advance could also be refunded and then subsequently disallowed.

The Service’s determinations related to PTC eligibility are subject to the same deficiency procedures available to other refundable tax credits under Section 6211(b)(4). Thankfully, there is nothing analogous to the Earned Income Credit ban for PTC.

The ACA does not impose any limits on the Service’s collection powers for excess PTC; therefore, collection may take the form of liens, levies and refund offsets. Penalties and interest may be assessed as with any other unpaid income tax liability.

The uncertainty around accuracy-related penalties under section 6662 is relevant to recipients of the Premium Tax Credit, and particularly to taxpayers who take APTC. The accuracy-related penalty is complex, and I will not describe it in detail here (it has been the subject of several previous Procedurally Taxing posts, including just this past week). In brief, the penalty may be imposed when there is an underpayment of tax as defined in section 6664. In Program Manager Technical Advice Memorandum 2012-016, the Service has conceded that the accuracy penalty does not apply if a disallowed refundable credit was frozen and not actually received by the taxpayer. Previously, the Service asserted that the accuracy penalty did apply if the disallowed credit was received by the taxpayer. However, in Rand v. Commissioner the Tax Court held that disallowed refundable credits cannot reduce the amount shown as tax on the return below zero. 141 T.C. No. 12 (2013). The Commissioner initially appealed the decision to the Seventh Circuit. On June 10, 2014, the parties filed a stipulation to dismiss the appeal with prejudice. It remains to be seen whether the Service will attempt to overrule Rand through regulations or other means.