Source: https://procedurallytaxing.com/third-party-fraud-and-aptc-repayment-liability/
Timestamp: 2019-04-18 23:04:53+00:00

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As we move into fall, it’s time for the 10.6 million individuals with “Obamacare” insurance to start thinking about 2019 open enrollment. The Centers for Medicare and Medicaid Services (CMS) released three reports in July illuminating aspects of the Health Insurance exchanges (or Marketplaces) created by the Affordable Care Act (ACA). These reports are described in detail by Katie Keith on the Health Affairs blog. Unsurprisingly, most people with 2018 Marketplace plans are receiving advance premium tax credits (APTC) to subsidize their premiums (87%, up slightly from 84% in 2017). CMS points out that premiums in the exchanges are rising and may be pricing out consumers who do not qualify for APTC.
The Premium Tax Credit can make health insurance affordable for people without other options, but its structure of advance estimated payments combined with a sheer eligibility cliff when the advance payments are reconciled inevitably leads to harsh outcomes in some cases. (A few were discussed on this blog here.) As APTC absorbs the cost of premium increases, the stakes will only become higher for taxpayers. This blog post gives a brief background on APTC reconciliation in the context of the Tax Court’s deficiency jurisdiction, then highlights one circumstance in which taxpayers should be able to avoid APTC liability: fraudulent enrollment.
The Premium Tax Credit is payable in advance through an ACA exchange, subject to reconciliation on each year’s tax return. See 42 U.S.C. § 18082; section 36B(f). (“Marketplace” is the federal government’s preferred term in public communications; however, this blog will follow the statute and regulations in referring to exchanges.) Under section 36B(f), excess APTC awarded by an exchange is considered an income tax liability, subject to certain caps. If a household’s modified adjusted gross income reported on the tax return is above 400% of the federal poverty guideline, the taxpayers must repay all APTC received by themselves or their tax dependents. This eligibility cliff leads to harsh results as many including the National Taxpayer Advocate and the Tax Court have recognized.
As an income tax liability, a taxpayer’s excess APTC may be redetermined by the Tax Court if the IRS issues a Statutory Notice of Deficiency and the taxpayer timely appeals. See sections 6211 through 6216. However, Tax Court review may not get the taxpayer the result they desire. Some of the most frustrating APTC cases for taxpayers involve government or third-party culpability. For example, in McGuire v. Comm’r, 149 T.C. 9 (2017), the exchange failed to process an income change that the taxpayers duly reported. It erroneously continued APTC payments even though the taxpayers’ income was too high. The Tax Court expressed sympathy but found there was nothing it could do to help the taxpayers avoid repayment, because they had received APTC to which they were not entitled. Likewise, in Gibson v. Comm’r, T.C. Memo. 2017-187, the taxpayers’ young adult dependent had signed up for APTC without the taxpayers’ knowledge. Since they did not disclaim their son as a dependent, the taxpayers were stuck with the repayment obligation.
Petitioners should understand that the Tax Court is a court of limited jurisdiction and that we are not at liberty to make decisions based solely in equity. See Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Woods v. Commissioner, 92 T.C. 776, 784-787 (1989); Estate of Rosenberg v. Commissioner, 73 T.C. 1014, 1017-1018 (1980); Hays Corp. v. Commissioner, 40 T.C. 436, 442-443 (1963), affd. 331 F.2d 422 (7th Cir. 1964) In other words, absent some constitutional defect, we are constrained to apply the law as written, see Estate of Cowser v. Commissioner, 736 F.2d 1168, 1171-1174 (7th Cir. 1984), affg. 80 T.C. 783 (1983), and we may not rewrite the law because we may deem its “‘effects susceptible of improvement'”, see Commissioner v. Lundy, 516 U.S. 235, 252 (1996) (quoting Badaracco v. Commissioner, 464 U.S. 386, 398 (1984)). Accordingly, petitioners’ appeal must, in this instance, be addressed to their elected representatives. “The proper place for a consideration of petitioner’s complaint is in the halls of Congress, not here.” Hays Corp. v. Commissioner, supra at 443.
Zedaker v. Comm’r, T.C. Summary Opinion 2011-64. Given the statutory language and the Tax Court’s limited jurisdiction, taxpayers must generally seek remedies elsewhere for inequitable APTC debts.
A taxpayer who disputes the enrollment or APTC information provided to the IRS by the exchange should try to resolve the dispute with the exchange. It is always a good idea to try to address disputes through the exchange, even if you have a plausible argument in Tax Court. (There have been instances in which the exchange’s Form 1095-A did not match the insurance company records; it might be possible to prevail in Tax Court in such a case.) Exchanges do not like to make retroactive changes, however. After all, the federal government is relying on private insurance companies to offer insurance on the exchanges, and those companies can lose money from retroactive enrollment changes. The exchanges have tried to balance the financial needs of insurance companies with the reality that Form 1095-A can bring genuine errors and other compelling situations to light.
In narrow circumstances, therefore, third-party misdeeds and exchange errors can entitle a taxpayer to nullify their exchange enrollment and avoid any APTC repayment obligation. Generally, the taxpayer must pursue this through the exchange or through their purported insurance company. Two recent practitioner inquiries reminded me that this is very much a live issue that needs to be identified as soon as possible when a taxpayer seeks assistance. Time is of the essence; the exchange regulations guarantee taxpayers only a short window to request retroactive changes.
This right to retroactive cancelation was added to the regulations in the Notice of Benefit and Payment Parameters for 2017, effective May 9, 2016. Note that there is no provision for erroneous APTC: if a taxpayer knowingly enrolled in coverage but received too much APTC, the exchange regulations do not offer a remedy.
Insurance broker fraud is of particular concern and is a major reason that exchanges grant retroactive cancellations. One of the earliest reported examples came out of North Carolina in 2015. An insurance broker collected names and SSNs at homeless shelters, and ultimately enrolled 600 people. This earned him $9,000 per month in commissions, until the insurance company terminated the relationship. Some of the people enrolled were told they were getting “free insurance”, but others said they did not know they were signing up for insurance at all. The applications conveniently inflated the taxpayers’ income to exactly 100% of the federal poverty level, where they would not owe a monthly premium. While the broker collected his commissions, the enrollees were stuck with insurance that they could not use (for lack of funds to meet the deductible or cost-sharing) or did not know about. Just having “free” insurance caused hardships for those who relied on programs for the uninsured to receive prescriptions and medical care.
Many of the complainants only learned that they had been enrolled in QHPs when notified by the IRS that their tax refunds would not be processed until they submitted Form 8962 to reconcile their Premium Tax Credit. …Because contact information for consumers may not be correct, the 1095-As did not reach many of the enrollees.
Also, many of the complaining consumers had other health insurance coverage.
5. No claims have been filed for any of the enrollees on each policy.
The regulation permitting cancelation can encompass a broader range of circumstances, but taxpayer representatives should check to see if their client meets the criteria for faster resolution of their dispute.
One note on timing. While the regulation grants a 60-day dispute window, I would encourage advocates to try for cancelation in compelling situations even if the taxpayer discovered the fraudulent enrollment over 60 days ago. The regulation sets minimum requirements for exchanges to allow cancelations; it does not prevent an exchange from allowing a longer window or from making exceptions to the time limit under a reasoned, consistently applied policy. An exchange’s approach to cases beyond the 60-day window may vary also depending on whether the insurance company consents to the cancelation.
Roberts owned several IRA accounts, and during the year at issue, someone withdrew substantial amounts from those accounts. Roberts said his now ex-wife forged his signature and took the money, while the ex-wife said that she had nothing to do with it. The IRS took the position that even if she took the money, Roberts as the owner of the retirement accounts, was still taxable on the withdrawals.
Judge Marvel found that Roberts’ wife had in fact withdrawn the funds from his IRA accounts. The Court went on to hold that because Roberts did not request, receive, or benefit from the IRA distributions, he was not a payee or distributee within the meaning of section 408(d)(1).
Could a similar legal argument be made in the case of fraudulent exchange enrollment? If a taxpayer had no idea they were signed up for insurance and they meet all five criteria set out by CMS for expedited cancelation, were there actually “advance payments to [the] taxpayer” made within the meaning of section 36B(f)(2)? This may be ultimately a losing argument, but it could be one worth trying. It seems wisest to continue advocacy with the exchange, issuer and CMS, even if the taxpayer is pursuing an administrative or Tax Court appeal.
Christine Speidel is Assistant Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate.

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