When Is A Penalty Automatically Calculated Through Electronic Means?

Christine here, posting incognito. 

Special Trial Judge Diana Leyden issued a nondesignated order in April 2018 that signals interesting reading and litigation ahead on another Graev-related issue: when is a penalty “automatically calculated through electronic means” so that supervisory approval is not required? Thanks to Carl Smith for alerting us to this order in Triggs v. Comm’r. This is not a new legal issue, but it is newly salient in deficiency litigation since the Tax Court’s December 2017 ruling in Graev III (first blogged on PT here).  


When a tax return omits income or overstates credits, an accuracy-related penalty might be imposed under section 6662(b). At issue in Triggs are the negligence penalty in section 6662(b)(1) and the understatement penalty in section 6662(b)(2). There are several other grounds for accuracy penalties in section 6662, which are not discussed here.  

The Graev and Chai litigation concerned section 6751(b)(1), which generally requires written supervisory approval before the IRS assesses a penalty. However, section 6751(b)(2) sets out two exceptions to that requirement. 

Paragraph (1) shall not apply to— 

(A) any addition to tax under section 6651, 6654, or 6655; or 

(B) any other penalty automatically calculated through electronic means.

Section 6651 contains the failure to file and failure to pay penalties. Sections 6654 and 6655 establish estimated tax penalties. The application of these penalties is mechanical and automatic, as many of us have explained repeatedly to indignant clients. Taxpayers can contest the 6651 penalties (and sometimes the 6654 penalty) by showing that their failure to comply was due to reasonable cause and not willful neglect. However, this burden is on the taxpayer.  

That brings us to section 6751(b)(2)(B). What else counts as a “penalty automatically calculated through electronic means”? Which of the accuracy-related penalties might be considered sufficiently automatic, and under which circumstances? Can a determination of negligence ever be “automatically calculated”? Les pointed me to the authorities discussed in Saltzman & Book 7B.24, at n 889.1.  

Since at least 2002, the IRS has taken the position that supervisor approval is not required if a penalty is assessed entirely by an automated computer program. SCA 200211040 addresses Automated Underreporter (AUR) assessments of the negligence and substantial understatement penalties. It acknowledges a lack of legislative history to guide the analysis. The memo concludes that 

assessment of a penalty qualifies as one calculated through electronic means if the penalty is assessed free of any independent determination by a Service employee as to whether the penalty should be imposed against a taxpayer.  

The key fact according to the memo is that the taxpayer must respond to a proposed AUR assessment before any IRS employee looks at the matter and exercises judgment. This may seem surprising as to the negligence penalty, since to find negligence there must be a determination of whether a taxpayer made a reasonable attempt to comply with law and whether they exercised ordinary and reasonable care in doing so. See Treas. Reg. § 1.6662-3(b)(1). The SCA memo reasons, however, that  

programmed into the computer are uniform factual criteria under which the computer will automatically propose a negligence penalty; when a taxpayer, for a second year, fails to report income reported on third party information returns, the programmed determination is that the taxpayer has not exercised ordinary and reasonable care in the preparation of his return. When the computer program automatically assesses the penalty on the basis of this mechanical determination, we believe that it qualifies as an exception to the general rule requiring written supervisory approval. 

I find this rationale troubling. Hopefully IRS personnel also aim to use uniform factual criteria when deciding whether a negligence penalty is warranted. Very complex decisions can be made by computers if they are programmed to do so, but programming incorporates the biases and errors of human programmers. A computer does not necessarily arrive at a legally correct determination. There is a wealth of debate on this issue in other contexts, including criminal sentencing. As journalist Matthias Spielkamp puts it, “algorithms make no value judgments – except the ones designed by humans.” The AUR negligence logic tree may not be as complex as the algorithms that send people to prison or deny them credit, but the difference seems to me one of degree. As tax compliance has become more automated, and as algorithms have become more sophisticated, it is hard to identify any penalty decision that could not in theory be made by a computer program. 

Troubling or not, the IRS applied the reasoning of SCA 200211040 in 2014 to the frivolous tax filing penalty under section 6702, in CC 2014-004. As in the AUR function, the IRS had programmed its computer system to apply predetermined criteria for assessing the frivolous return penalty, and no human employee reviewed an individual assessment unless the taxpayer responded.  

The Triggs case involves the negligence and understatement penalties, asserted in the alternative. The IRS conducted a correspondence examination of Mr. Triggs’s return, but he did not respond until after the notice of deficiency was issued (with the proposed penalty). Like many of the post-Graev cases we have blogged, the trial in Mr. Triggs’s case occurred before the Graev III decision. In March 2018, Judge Leyden invited the IRS to file a motion to reopen the record to submit proof that it had complied with the penalty assessment procedures. The IRS responded by asserting that those procedures do not apply to Mr. Triggs’s case, because his penalty was proposed by the correspondence examination computer system without any human review and therefore falls under section 6751(b)(2)(B). This position is consistent with the reasoning in SCA 200211040 and CC 2014-004, although those memos did not involve correspondence examinations.   

However, Judge Leyden points out several IRM sections that seem inconsistent with this position. For example, the order notes: 

With respect to correspondence examinations, one provision of the IRM states: “The determination to assert penalties, to identify the appropriate penalties, and to calculate the penalty amount accurately is primarily the examiner’s responsibility. This responsibility remains the same even when examinations are conducted by correspondence.” IRM pt. (Mar. 1, 2003). 

Judge Leyden therefore orders the IRS to file a supplement by May 31, setting out the legal basis for its position in more detail, and specifically addressing the IRM provisions identified in the order. The supplement will be available at the Tax Court’s offices in Washington, D.C., if any enterprising reader is motivated to obtain a copy.  

In 2014, in response to the IRS position on AUR assessments, the National Taxpayer Advocate issued a legislative recommendation that Congress amend section 6751(b)(2)(B) to specify which penalties are not subject to the general requirement, and to specifically exclude the negligence penalty. She has maintained that recommendation for several years, and it is now included in the Purple Book compilation. That recommendation will be even more important if the government maintains its current position in Triggs 

The Individual Mandate Loses Another Tooth

Christine Speidel brings us up to the minute on the individual mandate.  Keith

The Affordable Care Act has been limping along despite persistent efforts to roll back the law and loosen its interpretation and administration. Even the individual mandate remains in force for 2014 through 2018, to the chagrin of those who assumed that it would be repealed immediately or not enforced in the wake of 2017’s executive order. Nevertheless, the individual mandate is on its way out, and recent developments weaken its bite for the tax years to which it applies.  

The individual shared responsibility provision (ISRP) of the Code (section 5000A) requires most people to have health insurance, claim an exemption, or make an individual shared responsibility payment. In its preliminary review of the 2018 filing season, TIGTA reports that as of March 1 about 1.5 million tax returns reported ISRP totaling $993.9 million for 2017. Also, for the 2018 tax season the IRS implemented a filter to reject as incomplete returns which failed to report any of those three things. TIGTA reports that as of February 28, 2018 just over 104,000 “silent returns” had been rejected from e-filing.  

Taxpayers will have to report on their insurance status for at least one more tax season. In the December 2017 tax act, Congress reduced the penalty for not having insurance to $0 beginning on January 1, 2019. However, I’ve encountered people who believe the mandate is no longer in effect, including attorneys. I can understand why if they are checking the statute online. The way section 5000A was amended makes it look like the mandate is repealed already, but the effective date in the 2017 tax law says otherwise. The penalty is imposed per month without coverage or an exemption, and the Act § 11081(b) says “the amendments [to section 5000A] shall apply to months beginning after December 31, 2018.” Fortunately TIGTA reads that language the same way I do, so I can refer skeptics to their report.


Although the ISRP is still in effect, recent administrative guidance opens the door for many more taxpayers to get a hardship exemption. On April 9, 2018, the Center for Consumer Information & Insurance Oversight (CCIIO) issued guidance providing additional expansive examples of circumstances for which hardship exemptions will be granted. The guidance also indicates that applications will be accepted without documentation. The applicant must submit a brief explanation, and “should provide documentation” “when available”.  

Exemptions from the ISRP must ultimately be claimed on a tax return, but hardship exemptions must first be approved by the Marketplace. (The IRS Form 8965 instructions have a helpful chart explaining how to claim the various exemptions.) All states except Connecticut use the federal marketplace for hardship exemptions. 

Hardship is defined in the exchange regulations and includes the catchall, “other circumstances that prevented [a person] from obtaining coverage under a qualified health plan.” 45 CFR § 155.605(d)(1). HHS (through CCIIO) has elaborated on the regulatory definition in guidance, and it posts hardship information and application forms on Healthcare.gov.   

The Marketplace hardship application lists 14 types of hardships, and the applicant must check off which boxes apply to them. The categories include homelessness, foreclosure or eviction, natural disaster, and domestic violence, among others, and the last category is “other”. These “category 14” hardship applications are reviewed on their merits and are well worth trying if your client can write a paragraph about why they should not have to pay a penalty. This has been the case for some time, but recent guidance provides reinforcement of the Marketplace’s current approach.  

The April 9 hardship guidance describes four additional examples of “category 14” hardships, which could apply to a significant number of people. Under the guidance, a hardship exemption may be granted if the applicant has no access to a Marketplace plan, or if there is only one insurance company offering plans in the applicant’s location. The latter is a major development. The Kaiser Family Foundation reported that “In 2018, about 26% of enrollees (living in 52% of counties) have access to just one insurer on the marketplace.”   

The guidance goes on to give two more examples of personal circumstances that will support a hardship exemption: first, people who object to buying a plan that covers abortion and have no other options in the Marketplace; and second, people whose personal circumstances create a hardship in accessing care through their Marketplace plans.  

Practitioners whose clients paid or owe the ISRP for prior years should consider submitting a hardship exemption application and filing a protective claim for refund with the IRS. The exchange regulations allow hardship applications to be submitted “during one of the 3 calendar years after the month or months during which the applicant attests that the hardship occurred.” 45 CFR § 155.610(h)(2). The April 9 guidance indicates that the hardship must have occurred within the current calendar year or the prior two calendar years. (I nearly missed this but caught it in the Health Affairs blog.) So, the federal Marketplace’s position is that one could apply today based on a hardship from January 2016 or later. I am glad to have clarity on the Marketplace’s approach, but I question whether it makes sense. It seems that a 3-year period has been turned into less than 3 years, depending on when one’s hardship occurs. A calendar year is January 1 to December 31. If a hardship occurs in April 2018, isn’t the first calendar year after the month of hardship 2019? Alternately, if you’re using the second dictionary definition of “calendar year” (365 days), shouldn’t the applicant have 36 months after the month of hardship?  

To close out this ISRP update, last but not least I recommend reading the National Taxpayer Advocate’s Tax Day testimony before the House of Representatives. Her testimony touches on many areas of concern including taxpayer confusion about their ISRP obligations, and particular difficulties the Amish and Mennonite communities face in attempting to comply. These difficulties were not helped by the IRS mistakenly treating these taxpayers as “silent return” filers in 2017. The continuing and upcoming changes to the ISRP surely do not help either.

How a Credit is not the Same as a Refund

We are still working out logistics to get Christine Speidel full access to the blog site. In the meantime I introduce her most recent post which focuses on the distinction between giving a taxpayer credit and giving the taxpayer a refund. Keith

On April 4, 2018, the Eleventh Circuit ruled in Schuster v. Commissioner that a credit applied to a taxpayer’s account is not the same thing as a refund. This was bad news for the taxpayer.

Sometimes the IRS messes up when it applies payments, and mistakenly gives the taxpayer an account credit or a refund that the taxpayer did not deserve. If the error is discovered many years later, it can get complicated to figure out where the parties stand and which remedies are available to each.


Mr. Schuster’s case stems from an IRS error in 2005, when it applied an $80,000 check meant for his mother’s taxes to Mr. Schuster’s 2004 income tax account. If Mr. Schuster had requested a refund when he filed his 2004 tax return, the case would be very different and the outcome might have changed. Instead, Mr. Schuster’s tax returns for 2004 through 2007 asked that his refunds be applied to the following year’s estimated tax. (Line 77 on the current Form 1040)

In 2011, the IRS discovered its mistake and reversed the erroneous credit. Mr. Schuster had made payments (apart from the $80,000) that satisfied his tax liabilities for 2004 and 2005, but not for 2006. So, after the credit was reversed the IRS sent Mr. Schuster a bill for his 2006 balance due. The case came before the Tax Court on a CDP appeal of a notice of intent to levy.

The government has many mechanisms it can use to collect from taxpayers who owe money to the Treasury. One of these mechanisms is an erroneous refund suit under section 7405. An erroneous refund suit must be brought within 2 years of the refund, except in cases of fraud. IRC 6532(b). Mr. Schuster argued that the $80,000 credit applied in 2005 was an erroneous refund that started the 2-year clock running. He argued that the IRS effectively created an end-run around 7405 by using its administrative collection powers, and it should not be permitted to do that. For its part, the IRS argued that the error at issue was a “credit transfer” which did not implicate section 7405 at all. In the IRS’s view, the appropriate statute of limitations is found in section 6502, providing for a 10-year collection period following assessment of tax. Both the Tax Court and the Eleventh Circuit sided with the IRS.

From a taxpayer’s perspective one can understand how unfair this feels. The $80,000 would have been refunded to the taxpayer had he not elected to have it credited to his 2005 (and then 2006) liability. I imagine Mr. Schuster thought he was doing a good deed as a taxpayer by making that election. If he had received a refund check and then sent an estimated tax payment to the IRS, section 7405 would apply. Economically the taxpayer would be in the same position. But the tax code does not run on fairness or logic. Also, there are complications beyond the distinction between a refund and a credit.

In the 1990s there were seven circuit court cases that addressed whether the government could treat erroneous refunds as unpaid tax, and thereby use its administrative collection powers to recover the funds. The government lost those cases. The courts of appeals held that once a taxpayer has paid their assessed taxes, a subsequent erroneous refund does not re-open the liability, and therefore the erroneous refund cannot be treated as an unpaid tax liability to be collected administratively under the original assessment. See O’Bryant v. United States, 49 F.3d 340, 346 (7th Cir. 1995); Mildred Cotler Trust v. United States, 184 F.3d 168, 171 (2d Cir. 1999); Stanley v. United States, 140 F.3d 1023, 1027-28 (Fed. Cir. 1998); Singleton v. United States, 128 F.3d 833, 837 (4th Cir. 1997); Bilzerian v. United States, 86 F.3d 1067, 1069 (11th Cir. 1996); Clark v. United States, 63 F.3d 83, 87 (1st Cir. 1995); United States v. Wilkes, 946 F.2d 1143, 1152 (5th Cir. 1991). For example, in the O’Bryant case, the taxpayers fully paid their liability but the IRS accidentally credited the payment twice, and issued a refund check. The Court held that the IRS could not use its administrative lien and levy procedures to recoup the erroneous refund.

Unfortunately for Mr. Schuster, he had not actually paid all of his assessed taxes for 2006. The Tax Court opinion (by Judge Chiechi) cites the Clark and Wilkes cases for the proposition that a tax assessment can only be extinguished by a payment tendered by the taxpayer, and not by an IRS clerical error. (Refunds resulting from clerical errors are often referred to as nonrebate refunds.) Therefore, the court holds that the 2006 assessment was not extinguished by the $80,000 credit, and the IRS could use its administrative collection powers to pursue the balance. The Court further found that the erroneous credit was not a refund for purposes of section 7405, so the two-year time limit did not apply.

The Eleventh Circuit affirmed the Tax Court, under different (though not inconsistent) reasoning. The per curiam opinion is short and to the point. The court notes that the Code distinguishes between a refund and a credit in several places, and section 7405 specifically only refers to refunds. Therefore, following basic statutory interpretation principles, the Eleventh Circuit holds that section 7405 does not apply to erroneous account credits.

Is the lesson for taxpayers to eschew line 77 and always request their refund? This does not guarantee a windfall for the taxpayer as the government may act within the 2 years or it may be able to use other mechanisms to collect the funds, but it makes the government’s task more difficult especially if the taxpayer takes care to remit legitimate payments covering their assessment.












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 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.


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.



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 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.


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.


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).


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., 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 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. 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.