Source: https://procedurallytaxing.com/category/aca/page/2/
Timestamp: 2019-04-22 16:19:24+00:00

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Today we welcome back guest blogger Professor Bryan Camp of Texas Tech. Professor Camp writes today on the issue of the proper classification of the liability imposed for failure to obtain health insurance. The issue can apply to many excise taxes and has importance in the bankruptcy context.
Whether a debt is a tax or a penalty is not always easy to determine. The Supreme Court has weighed in on this topic twice, first in Sotelo v. United States, 436 U.S. 268 (1978)(in a case involving the trust fund recovery penalty) and then in United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996)(in a case involving the excise tax for failure to properly fund a pension plan). In each case the Court determined that the label in the statute did not match the true nature of the statute.
For the reasons discussed below the fold, I do not think the courts are likely to consider the ACA penalty an excise tax which can achieve priority status. They are more likely to classify it as a penalty which will become a general unsecured claim.
First, the ACA calls it a penalty and not a “tax.” IRC 5000A(g) provides that “the penalty provided by this section shall be…assessed and collected in the same manner as an assessable penalty under subchapter B or chapter 68.” The Congressional decision to label this exaction a “penalty” and not a “tax” was a critical reason why the Supreme Court held that challenges to the penalty were not barred by the Anti-Injunction Act. National Federation of Independent Business v. Sebelius, 132 S.Ct. 2566, 2582-3. The Court found that, although the label did not matter for constitutional purposes, it did matter for purposes of figuring out the relationship of the ACA penalty with other statutes because statutes “are creatures of Congress’s own creation. How they relate to each other is up to Congress, and the best evidence of Congress’s intent is the statutory text.” As in the NFIB case, here we have to figure out the relationship between the use of the work “tax” in the bankruptcy code and in the tax code. Accordingly, the Congressional decision to label the payment as a penalty, and to direct that it be collected in the same manner as other assessable penalties, establishes a strong presumption that it is not a tax for purposes of other statutes, including the Bankruptcy Code.
Therefore, I don’t see a bankruptcy court treating the ACA as an excise tax or any other kind of tax. I’m betting the IRS guidance is calling it an excise tax because section 5000A is in the excise tax chapter. Theoretically, one might defend the penalty as an excise tax because it is imposed on taxpayers for engaging in certain transactions—or failing to engage in specified transactions, which is economically the same thing. But I don’t see either of these two rationales for treating the ACA penalty as an excise tax as being very strong.
A good case to consider is In re Marcucci, 256 B.R. 685 (D. N.J. 2000), where the district court agreed with four bankruptcy courts that certain payments mandated by the State of New Jersey—payments quite similar in structure and purpose to the ACA penalty—were not excise taxes but were penalties. In Marcucci, the court considered the character of a “motor vehicle surcharge” that New Jersey imposed on drivers who were considered high risk or convicted of certain traffic offenses. These mandated payments to the state were to help the state fund a pool of money intended to even out the risk among all drivers. The surcharges had been imposed by private insurers but the New Jersey legislature decided that the market was unfair and inefficient and so rather than indirectly regulating surcharges, decided to have the surcharge program administered by the DMV. The state argued that these were excise taxes but the court disagreed.
The NJ surcharge at issue in Marcucci is quite similar to the ACA shared responsibility payment. The ACA penalty is imposed more as a consequence for violating the Individual Mandate (and, consequently, to encourage compliance) than to raise revenue. See Jordan Barry and Bryan Camp, “Is the Individual Mandate Really Mandatory,” Tax Notes, June 25, 2012, p. 1633.
Second, however, just because the ACA penalty is not a tax does not automatically disqualify it from priority status. Some penalties get priority status in bankruptcy and some do not. Section 507(a)(8)(G) describes the kind of penalties that get priority status as “[a] penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.” The legislative history provides that such claims cannot be punitive in nature and that in regard to taxes such claims represent collection of the principal tax liability under the misnomer of a “penalty” See 124 Cong. Rec. H. at 11,096 and 11,113 (Sept. 28, 1978). For this reason, these types of penalties are called “pecuniary loss penalties.” All other penalties are nonpecuniary loss penalties and they are treated as general unsecured claims.
In addition to the priority issue I would be remiss to omit a word about dischargeability. The starting point for discharge of non-priority tax penalties is governed by §523(a)(7). Non-pecuniary loss penalties may not get priority status, but they also may not be discharged in bankruptcy if they arose within three years prior to the petition date. The one exception to the 523(a)(7) rules are for debtors who successfully complete their Chapter 13 plans. They get a “super discharge” which, per §1328(a) includes an unqualified discharge of all non-pecuniary loss penalties. Chapter 13 debtors who fail to complete their plans, however, get the usual rules. §1328(b).
Carefully parsed, the section initially makes nondischargeable a “debt that is for a fine, penalty or forfeiture payable to and for the benefit of a governmental unit.” Withdrawn from this class, however, are any such fines, penalties, or forfeitures that are “compensation for actual pecuniary loss.” These are dischargeable. The double negative, “does not discharge” and “not compensation for actual pecuniary loss,” accomplishes this end.
Another group of penalties are withdrawn from the nondischargeable group. These appear in parts (A) and (B) of § 523(a)(7). Part (A) withdraws tax penalties attributable to taxes which are not nondischargeable. That is, part (A) makes dischargeable tax penalties attributable to dischargeable taxes. This follows because part (A) relates “to a tax of a kind not specified in paragraph (1) of this subsection.” 11 U.S.C. § 523(a)(7)(A) (emphasis added). Those types specified in paragraph (1) are not dischargeable taxes. In relevant part “paragraph (1) of this subsection” makes not dischargeable “any debt” that is “for a tax … with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” 11 U.S.C. § 523(a)(1)(C).
The other group of penalties withdrawn from the nondischargeable group is described in part (B). It is quite straightforward. It makes dischargeable any tax penalty “imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.” A penalty imposed on unpaid taxes accruing more than three years before the filing of the bankruptcy petition is dischargeable.
The bottom line for me is that bankruptcy courts will likely treat the ACA penalty as a general unsecured claim, which means it stands way back in the payout line. The trick is to be sure that the due date of any return that omits paying the ACA penalty is older than three years before the bankruptcy petition date unless your client is one of those rare debtors who successfully completes their Chapter 13 plan, and then they do not need to worry about that.
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.
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.
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.
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.
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).
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  tax return and reconcile any premium tax credit you used?” See, application forms at marketplace.cms.gov. Strictly speaking, “reconciliation” means that an income tax return was filed, and the return included Form 8962, Premium Tax Credit, reporting the APTC received. See, id.; I.R.M. 21.6.3.4.2.16, Premium Tax Credit (10-01-2015); 45 C.F.R. § 155.305(f)(4). A pending examination of the PTC does not prevent a taxpayer from receiving APTC for 2016, as long as Form 8962 was filed with the return. However, the filing of an income tax return without Form 8962 could prevent a taxpayer from receiving APTC for the following year, depending on how IRS and HHS administer the reconciliation obligation. For 2016 enrollment, the government has reportedly taken a taxpayer-friendly approach to this question, requiring only that a 2014 tax return have been filed. This has not been formally announced, it is not reflected in the application questions, and it remains to be seen whether this approach will continue in future years.
Taxpayers do not have to have paid back any excess 2014 APTC in order to receive APTC for 2016. See, I.R.M. 21.6.3.4.2.16, Premium Tax Credit (10-01-2015); 45 C.F.R. § 155.305(f)(4). This makes practical sense because excess APTC is treated as additional income tax liability. I.R.C. § 36B(f)(2)(A). Its collection is not tracked separately by the IRS.
LITCs may soon begin to see situations in which IRS has assessed an erroneous liability related to APTC, including PTC audit reconsideration cases. Taxpayers should be reassured that controversies over the correct liability will not affect ongoing eligibility for APTC. If IRS has assessed tax liability based on a taxpayer’s 2014 APTC, that is sufficient reconciliation for 2016 APTC purposes, whether or not the liability is correct.
In some situations, exchanges may have data indicating that the taxpayer failed to reconcile when in fact that is not the case. This could happen if the taxpayer filed a return late in the year, especially if it was a paper return. Because the government recognizes that exchange data will lag behind reality, exchanges will accept an attestation that the applicant reconciled APTC. See, CMS Assister Newsletter, Oct. 14, 2015, section IV (on file with author). This is consistent with the general application processing regulations that require exchanges to provide subsidies based on an applicant’s attestation, pending resolution of an inconsistency. See, 45 C.F.R. § 155.315(f)(4). A question regarding APTC reconciliation has been added to the HealthCare.gov application forms. See, Application Forms for Individuals and Families at marketplace.cms.gov.
Some taxpayers may believe that they reconciled APTC when in fact they failed to file Form 8962, Premium Tax Credit. The IRS attempted to catch these cases on the front end by holding up the processing of tax returns which it identified as lacking a required From 8962. Taxpayers whose returns were held up received Letter 12C, Individual Return Incomplete for Processing, requesting Forms 8962 and 1095-A. See, I.R.M. 21.6.3.4.2.16.3 At-Filing Overview (10-01-2015). The IRS also sent out letters last July (Letters 5591, 5591A, and 5596), delivering a warning to taxpayers who had failed to reconcile by that point.
Taxpayers who responded to a Letter 12C with a completed Form 8962 generally had their accounts adjusted. In some situations those taxpayers may have been told to file an amended return, in which case that would need to be filed before the taxpayer could receive APTC for 2016. See, I.R.M. 21.6.3.4.2.16.5, Premium Tax Credit Math Error Notice Responses (10-01-2015), paragraphs 4 and 6. Also, some taxpayers may have responded in ways that were not sufficient for IRS to reconcile APTC on their accounts, and mistakenly believed their response was sufficient. Several of these taxpayers contacted Vermont Legal Aid last summer after receiving an IRS letter. Perhaps because of the widespread confusion, taxpayers in this group reportedly will not be prevented from receiving APTC for 2016. However, the federal government could change this practice for future years and may be planning to do so. The government has not formally announced any leniency for 2016, perhaps because it would prefer that taxpayers actually reconcile APTC, and perhaps because it does not anticipate this leniency continuing next year. Taxpayers may learn during the 2017 enrollment process that their 2015 APTC was not actually “reconciled” according to IRS records. If IRS and HHS procedures change next year it will be important for those taxpayers to take corrective action before open enrollment ends.
Taxpayers who filed a 2014 return but failed to properly reconcile APTC should have a pending correspondence examination by this point. If a taxpayer realizes that he or she did not file Form 8962, the fastest way to fix it may be to file an amended tax return. Alternately, the taxpayer can attempt to resolve it through the examination process.
We here at PT are huge fans of self-promotion, so I am thrilled to link Les’ recent article in The Tax Lawyer. Les’ article, Academic Clinics: Benefitting Students, Taxpayers, and the Tax System, was published in the Tax Section’s 75th Anniversary Compendium – Role of Tax Section in Representing Underserved Taxpayers. There are various other articles in the full publication that are worth reading (and hopefully will make you all feel guilty enough that you aren’t doing enough pro bono work to either cause you to assist some underserved folks or donate some money to those who are).
Hopping in the not-so-wayback-machine, in October of 2014, SumOp covered Albemarle Corp. v. US, where the Court of Federal Claims held that tax accruals related back to the original refund year under the “relation back doctrine” in a case dealing with the special statute of limitations for foreign tax credit cases. As is often the case in SumOp, we did not delve too deeply into the issue, but I did link to a more robust write up. It seems the taxpayers were not thrilled with the Court of Federal Claims and sought relief from the Federal Circuit. Unfortunately for the taxpayer, the Fed Circuit sided with its robed brothers/sisters, and affirmed that the court lacked subject matter jurisdiction because the refund claim had not been made within the ten year limitations period under Section 6511(d)(3)(A). This case deserves a few more lines. The language in question states, “the period shall be 10 years from the date prescribed by law for filing the return for the year in which such taxes were actually paid or accrued.” When the tax was paid or accrued is what generated the debate.
In the case, a Belgium subsidiary and its parent company, Albemarle entered into a transaction, which they erroneously thought was exempt from tax, so no Belgian tax was paid. Years in question were ’97 through ‘01. In 2002, Albemarle was assessed tax on aspects of the transaction in Belgium, and paid the tax that was due. In 2009, Albemarle filed amended US returns seeking about $1.5MM in refunds due to the foreign tax credit for the Belgian tax. Service granted for ’99 to ’01, but not ’97 or ’98 because those were outside the ten year statute for claims related to the foreign tax credit under Section 6511(d)(3)(A). Albemarle claimed that the language “from the date…such taxes were actually…accrued” means the year in which the foreign tax liability was finalized, which would be 2002 instead of the year the tax originated. Both the lower court and the Circuit Court found that the statute ran from the year of origin. The Circuit Court came to this conclusion after a fairly lengthy discussion of what “accrue” and “actually” mean, plus a trip through the legislative history and various doctrines, including the “all events test”, the “contested tax doctrine”, and the “relation back” doctrine. The Court found the “relation back” doctrine was key for this issue, which states the tax “is accruable for the taxable year to which it relates even though the taxpayer contests the liability therefor and such tax is not paid until a later year.” See Rev. Rul. 58-55. This can result in a different accrual date for crediting the tax against US taxes under the “relation back” test and when the right to claim the credit arises, which is governed by the “contested tax” doctrine.
Prof. Andy Grewal, a past PT guest poster, has uploaded an article on SSRN entitled “King v. Burwell: Where Were the Tax Professors?” The post discusses possible reasons why tax professors largely did not enter the public debate on the merits of the legal arguments in King v. Burwell, and encourages them to be more active in future similar cases.
(1) Whether an underpayment applied against an equivalent overlapping overpayment to obtain a net interest rate of zero pursuant to Section 6621(d) is available for netting against another equivalent overlapping overpayment if the Service determines the first overpayment was erroneous, (2) Whether the same is true for an overpayment netted against an erroneous underpayment, and (3) Whether the cause of the error affects these answers.
(1) An underpayment that was previously netted against an equivalent overlapping overpayment is not available to net against another equivalent overpayment if the taxpayer has retained the benefit of the original interest netting (the interest differential amount paid or credited to the taxpayer). If, however, the taxpayer did not retain the benefit of the original netting, then the underpayment is available for netting against another overpayment. (2) The same analysis applies to an overpayment netted against an erroneous underpayment. (3) We are unaware of any circumstance where the cause of the error would change our answers.
I haven’t highlighted Prof. Jim Maule’s blog, MauledAgain, in a while, which is a failing on my part. Here you will find Prof. Maule’s post on tax fraud in the People’s Court and if you scroll down on this page you will find an update to the case. Two schmohawks agreed to commit tax fraud by transferring the value of a child tax credit. The plan fell apart, and one sued the other in People’s Court to enforce the “contract” between the co-conspirators. The Judge dismissed the case because fraudulent contracts are not enforced. Prof. Maule quotes from the show, where the plaintiff said, “What about pain and suffering?” Stole my line.
TIGTA has released a report about Appeals penalty abatement decisions, and it isn’t great. First, it isn’t great because, as the report concludes, Appeals is not adequately explaining its abatement decisions. I agree Appeals should indicate why it is abating penalties, but I do not agree with the second conclusion, which is that Appeals is leaving money on the table. Meaning, it should not be waiving those penalties. TIGTA reports that an additional $34MM could have been collected on the abated penalties. It also reported that many cases were inappropriately considered by Appeals because Compliance had not reviewed the abatement. Given that penalties are essentially applied to every underpayment, with no consideration to whether the taxpayer reasonably attempted to comply, it seems inappropriate to assume those penalties are all collectible (or to encourage Appeals to abate less).
On Jack Townsend’s Federal Tax Procedure Blog is a discussion of the tax perjury case, US v. Boitano (What would Brian Boitano do? Not perjure himself in a tax filing, that is for darn sure. This is Steve Boitano- presumably not related to the super hero/figure skater). Questions presented in the case were whether filing a document was required under Section 7206(1) for perjury, and what constituted filing. In Boitano, the taxpayer provided returns to an agent who was not authorized to accept filed returns. Agent realized the returns were questionable and never forwarded to appropriate Service employee for filing. The 9th Circuit held filing was required (not stated in statute), and giving the return to the agent did not constitute filing. Therefore, no crime under Section 7206(1).
Like Thor’s mighty hammer, the IRS has slammed down the tax law upon Marvel, and not even its super team of Avenger like lawyers could provide a Shield (select from Captain America’s, or Agents of) from the consequences. The Tax Court has decided the hulking consolidated group of the Marvel universe was required to offset its net operating loss by the cancellation of debt income, and could be applied against the NOL of one member of the consolidated group. I’ll touch on the holding below in broad strokes and I’ll stop trying to incorporate Marvel superheroes, but what I found most interesting about this case is that it arose out of the 1996 Chapter 11 Bankruptcy of Marvel, which seems to just print money with its movies now. I had completely forgotten also that two real life titans (of industry) got in dustup in ’96 about that bankruptcy, Ronald Perelman and Carl Icahn. You can read more about the amazing twenty year turn around here and here. That story is more interesting than the law in this one. Under Section 108(a), discharge of indebtedness income is not included as income if the discharge is pursuant to a Chapter 11 bankruptcy. The excluded income reduces certain other tax attributes in certain circumstances, including a reduction of NOLs that carryover from prior years. See 108(b)(1)(2). Marvel’s subsidiary only reduced the carryover for the subsidiaries in Chapter 11, and not the parent group that filed consolidated returns with the subs. The Tax Court found that the aggregate approach was required, and the COD income had to reduce the NOLs of the consolidated full group. I’ve glossed over the analysis, which is worthwhile if you have this specific type of issue.
The Middle District of Louisiana, after the Fifth Circuit vacated and remanded the case, reversed its prior decision and, under Woods, held that the Section 6662(e) valuation misstatement penalty could be imposed when the underlying transaction had been determined to lack economic substance. Chemtech Royalty Associates, LP v. US. This case was the result of some crazy tax planning by Dow Chemicals to goose its basis in a chemical plant. Here is Jack Townsend’s prior coverage of the case.
Sticking with substantial valuation misstatement penalty, the Tax Court in Hughes v. Comm’r upheld the penalty against a KPMG partner who claimed a step up in basis in stock when he transferred the shares to his non-resident spouse. This was based on some informal tax research, and conversations with some co-workers that were also informal. The Court essentially felt Mr. Hughes should have known better, and tagged him with a big penalty (probably didn’t help he was transferring the shares to try and ensure his ex-wife couldn’t make a claim for the increase in value).
IRS has released Chief Counsel Advice regarding abatement of paid tax liabilities. In taxpayer friendly advice, CCA 201520010 states the language of Section 6404(a) is “permissive” and does not require the liability to be outstanding. That Section states the “IRS is authorized to abate the unpaid portions of the assessment of any tax or any liability in respect thereor…” The reference to “unpaid”, according to the CCA, is not binding on the Service.
Issue 1: Yes. If the return is not filed, a penalty under I.R.C. § 6694(b) may be assessed if the return preparer signed the return and the return preparer’s conduct was willful or reckless.
Issue 2: Yes. Under the language of I.R.C. § 6694(b)(1), the return preparer penalty may be assessed if the tax return preparer prepares any return or claim for refund with respect to which any part of an understatement of liability is due to willful or reckless conduct. There is no requirement that the Service allow the amounts claimed on an amended return before the I.R.C. § 6695(b) penalty may be assessed.
Issue 3. The penalties under I.R.C. §§ 6694(a), 6694(b) or 6701 should not be assessed merely because the return preparer made and filed a claim for refund after the period of limitations for refunds had expired, because an “understatement of liability” does not include claims that are barred by the period of limitations. In addition, there may be extenuating circumstances that weigh against asserting the penalty. The amended return, for example, may be perfecting an earlier timely informal claim for refund.
The Service has announced it will be refunding the registered tax return preparer test fees. There will be a second refund procedure where you can request your time back…but it will be ignored.
From Jack Townsend’s Federal Tax Crimes Blog, looks like CI is going to be targeting TFRP cases.
Professor Andy Grewal in early May had an excellent blog post on Yale’s administrative law blog, Notice and Comment, which highlights more potential penalties on employers attempting to follow the ACA requirements.
A third issue discussed by the PMTA is how the section 6676 penalty is to be assessed. Frankly, I read the Code as providing that the assessment is done like a section 6672 responsible person trust fund penalty — straight to assessment, without the deficiency procedures applying. That seems to be what section 6671 provides. But, the PMTA takes the position that only for underlying issues on which the section 6676 penalty applies where there is no jurisdiction in the Tax Court under the deficiency procedures, such as for excessive refund claims regarding employment taxes or the section 6707A reportable transaction penalty, the section 6676 penalty is done by straight assessment, without prior notice to taxpayers. However, for section 6676 penalties on what would constitute a “deficiency” — and excessive refundable credit claims are clearly part of a deficiency under section 6211(b)(4)‘s special rules — the PMTA concludes that the section 6676 penalty should be asserted in a notice of deficiency. The PMTA reasons that Tax Court cases have in the past held that a penalty which is computed as a function of a deficiency (which I would point out includes extra late-filing and late-payment penalties on the tax deficiency) are also treated under the deficiency procedures. This reasoning is all mixed up. The Tax Court applies the deficiency procedures to penalties like the late-filing and late-payment penalties of section 6651(a) that are imposed on the tax deficiency only because of special language in section 6665(b) that directs the Tax Court to do so. There is no similar language in section 6671 directing deficiency procedures to apply to any penalties imposed in the following sections.
And another CCA (201517005), this one dealing with the statute of limitations for refunds based on foreign taxes deducted. Specifically, whether a refund claim more than ten years (yr 13) after the tax year in question (yr 2) was timely when it resulted from an NOL (yr 4) where the taxpayer elected to deduct foreign taxes paid instead of taking foreign tax credit. The IRS concluded that no, Section 6511(d)(2) applied to the NOL and required the claim to be made three years after the NOL year. Section 6511(d)(3), which allows for a ten year statute for refunds pertaining to foreign tax credits, was not applicable.
Apparently, some states are starting to scale back the amount of tax credits available for movie productions. Two years ago, The Suspect was filed in my building, staring Mekhi Phifer and no one else you have ever heard of. I think it was “catered” by a fast food joint, and they may have been using our coffee pots to make coffee. I can’t imagine Pennsylvania dropped the big bucks to land that film.
Emancipation day is throwing off filings again next year. I always assumed that had something to do with the date of the Emancipation Proclamation, but I was wrong. The Emancipation Proclamation went into effect January 1st, 1863. On April 16th, 1862, President Lincoln signed the Compensated Emancipation Act, freeing the enslaved living in the District of Columbia. The linked Rev. Ruling explains what those in Massachusetts who are celebrating Boston Marathon Day (Patriots Day-celebrating the shot heard round the world) should do also.
Initially when writing this, I was watching the US women’s national team take it to Colombia, and recalling what a jackass Sepp Blatter has been. Hoping this article is in reference to the shoe dropping on him next. Even if he didn’t evade taxes, he should have to pay someone money for suggesting he would boost viewership of the women’s game with hot pants. Or for not knowing who Alex Morgan is…or for making the women play on turf.
Most readers by now already know that the Supreme Court today decided King v Burwell. We have previously discussed the case and some of the many potential tax procedure issues that the decision might have considered. The most interesting tax procedural aspect of the case from my quick read is its approach to interpretation, that is its reliance on broader legislative purpose and its lack of referring to Chevron deference in its decision. Part of the Court’s rationale is that the decision implicated health care, a subject not in the IRS’s wheelhouse of expertise.
This approach[Chevron] “is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Con- gress to the agency to fill in the statutory gaps.” FDA v. Brown & Williamson Tobacco Corp., 529 U. S. 120, 159 (2000). “In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation.” Ibid.
This is one of those cases. The tax credits are among the Act’s key reforms, involving billions of dollars in spending each year and affecting the price of health insur- ance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep “economic and political significance” that is central to this statutory scheme; had Congress wished to assign that question to an agency, it surely would have done so ex- pressly. Utility Air Regulatory Group v. EPA, 573 U. S. ___, ___ (2014) (slip op., at 19) (quoting Brown & William- son, 529 U. S., at 160). It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort. See Gonzales v. Oregon, 546 U. S. 243, 266–267 (2006). This is not a case for the IRS.
This means of interpretation is important for a number of reasons. First, it means that a new administration with a new IRS Commissioner cannot reinterpret the law to take away subsidies. Second, it puts more power into the hands of Congress over administrative agencies (and therefore the executive), at least on issues at the core of congressional legislation. Third, and most important as a general principle, it rehabilitates a focus on the law’s purpose as a touchstone to interpretation, over a rigid and formalistic textualism that ignores real-world consequences. If followed through consistently, this principle would greatly improve our statutory interpretation.
In the near future, I suspect there will be a lot of discussion revolving around the Court’s approach in the case and perhaps whether it signifies a move away from Chevron when Congress tasks IRS with its typical grab bag of non-revenue raising policies. In the meantime, it looks like ACA is here to stay, leaving us and PT with many other procedural and administrative issues we are sure to discuss in the days ahead.
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.
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.
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.
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.
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.
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 1.2.20.1.1 (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 20.1.1.3.5 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 5.16.1.2 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 20.1.1.3.1 (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 20.1.1.3.1, #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.

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