Millions of Americans will receive an unwanted surprise this tax season as a result of the Affordable Care Act (“ACA”). Section 1412 of the ACA provides that a taxpayer may receive assistance in paying premiums for coverage in a qualified health plan through advance payments of the premium tax credit. These advanced premium tax credit payments are made directly to the insurance provider. Taxable year 2014 is the first year for which taxpayers will be required to reconcile the advanced tax credit payments received at the time of enrollment.
The premium tax credit is determined at the time the taxpayer enrolls in a qualified health plan through an Exchange and is based on projected household income and family size for the year of coverage. One of the challenges for those who enrolled in Obamacare was to determine the “projected household income” for the year of insurance coverage. If you are enrolling right now for the 2015 insurance period, you are required to estimate your 2015 household income to determine the amount of the tax credit you will receive.
Now is time to pay the piper.
So you obtained your medical coverage and premium tax credit to reduce your total monthly premiums. Under § 36B(f)(2) and § 1.36B-4(a)(1)(i) of the Income Tax Regulations, a taxpayer must reconcile, or compare, the amount of premium tax credit allowed on the tax return with advance tax credit payments. In other words, now you are required to compare the 2014 tax credit advanced at the time of enrollment based on projected income with the amount of the tax credit you are actually entitled based on actual income.
As you can imagine, changes in the assumptions used to calculate the advance credit payments can result in a difference between the amount of the advanced tax credit and the amount the taxpayer is actually entitled. Here is where Uncle Sam may come knocking on the door; if the advanced tax credit payments are more than the premium tax credit allowed on the return, the difference is treated as additional tax and may result in either a smaller refund or a larger balance due.
Millions of taxpayers will be shocked by the required repayment of the premium tax credit. A tax credit that many did not see and did not understand how it was calculated.
What is the penalty relief?
There are two penalties imposed by the IRS that most taxpayers are not clear about:
1. Section 6651(a)(2) (aka Failure to Pay Penalty) – IRS imposes a penalty on a failure to pay the full amount of liability by the original due date of the tax return, for individuals this is April 15. There is no extension after April 15 to pay your tax liability.
2. Section 6654(a) (aka Underpayment of Estimated Taxes) – IRS imposes a penalty in the case of an underpayment of estimated tax by an individual. Generally, taxpayers are required to make tax payments on non-wage income in quarterly installments.
To avoid tax penalties you are required to pay your tax due by April 15. Many taxpayers who received the advanced tax credit may not be able to pay the unexpected additional tax liability by April 15.
The IRS issued notice (Notice 2015-9) to provide penalty relief in two different ways:
- Limited relief for late payment of balance due
- Limited relief from penalty of an underpayment of estimated taxes
Who qualifies for relief?
You qualify for relief if:
1. the balance due on your taxes is related to an excess advance premium tax credit payment sent directly to your insurance company to help you pay for health insurance,
2. you are current on tax filing (you have to file your 2014 taxes) and other payment obligations, and
3. you report the amount of excess advanced premium tax credit on your 2014 tax return.
How do you claim relief?
In order to qualify for penalty relief, you have to file your 2014 taxes. When you receive a request for payment of your outstanding balance from the IRS, you can respond with a letter containing the statement ”I am eligible for relief granted under notice 2015-9, because I received excess advance payment.”
1. The waiver applies only to penalties and not interest that you will be assessed on your unpaid liability (Section 6601).
2. The waiver only applies to the penalty and not to the tax liability.
3. The Notice does not make it clear, but it implies that the relief is not available to the entire tax liability and only to the portion attributable to the repayment of the premium tax credit.
4. The notice DOES NOT apply to the penalties associated to the Individual Mandates (Section 5000A).