IRS penalty relief related to ACA tax credits

 

The IRS has issued additional guidance on ACA Advanced Premium Tax Credits and relief from certain penalties associated with the taxpayer receiving excess tax credits from a health insurance Marketplace. IRS Notice 2015-9 Penalty Relief Related to Advance Payments of the Premium Tax Credit for 2014 outlines how some taxpayers may not be subject to the penalties associated with the underpayment of taxes during the 2014 tax year. This is good news for self-employed individuals who pay quarterly federal taxes and can have a difficult time estimating their annual income at the beginning of the year. Download the Notice 2015-9 at the end of the post.

Estimated quarterly tax payments

Individuals who receive non-wage income such as when they invoice for a service or receive investment income generally have to make quarterly estimated tax payments.

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. – http://www.irs.gov/publications/p505/ch02.html

Underpayment penalty

Taxpayers will be not assessed a penalty for underpayment of the estimated taxes if, “…they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller”. – http://www.irs.gov/taxtopics/tc306.html

If a household who received Advance Premium Tax Credits (APTC) through the Marketplace to lower their monthly health insurance premium under estimated their income for receiving the APTC, the excess tax credits they received may push the quarterly tax payments they did make below the 90% threshold for avoiding the underpayment penalty. This could also apply to individuals with jobs where federal taxes are withheld from their paychecks. See also IRS limits on repayment of excess ACA tax credits.

Reconciling ACA tax credits Form 8962

The underpayment of estimated taxes will be evident when the tax payer reconciles their APTC, from Form 1095-A Tax Credit Statement on Form 8962 Premium Tax Credit worksheet, and the taxpayer calculates they must pay back excess APTC because their Modified Adjusted Gross Income is higher than they originally projected. The IRS has recognized the complicated nature of factoring in the APTC into an individual’s or family’s estimated tax payments and withholding amounts.

Penalty Relief for 2014

Some taxpayers who have a balance due on their 2014 income tax returns attributable to the reconciliation of their advance credit payments and the premium tax credit calculated on their returns may not be able to pay by the due date for payment, generally April 15. Taxpayers who do not pay their entire tax liability by the due date for payment generally would be liable for the § 6651(a)(2) penalty for failure to pay, unless they requested and were granted relief due to reasonable cause. Additionally, some taxpayers may discover when they reconcile advance credit payments with the premium tax credit that their estimated tax payments were understated, potentially making these taxpayers liable for the § 6654(a) estimated tax penalty. Therefore, in consideration of these factors, and consistent with the authority in § 6651(a)(2) and § 6654(e)(3) to provide relief from penalties for taxpayers, this Notice provides relief from the § 6651(a)(2) and § 6654(a) penalties for taxpayers who satisfy the requirements in this Notice.

Pursuant to this Notice, the Service will abate the § 6651(a)(2) penalty for taxable year 2014 for taxpayers who (i) are otherwise current with their filing and payment obligations; (ii) have a balance due for the 2014 taxable year due to excess advance payments of the premium tax credit; and (iii) report the amount of excess advance credit payments on their 2014 tax return timely filed, including extensions (Line 46 of Form 1040 or Line 29 of Form 1040A).

Further, the Service will waive the § 6654 penalty for taxable year 2014 for an underpayment of estimated tax for taxpayers who have an underpayment attributable to excess advance credit payments if the taxpayers (i) are otherwise current with their filing and payment obligations; and (ii) report the amount of the excess advance credit payments on a 2014 tax return timely filed, including extensions. – Notice 2015-9

Taxpayers must be current

Note that this only applies to tax payers who are current with their filings and payment obligations. This notice does not extend the time to file a person’s 2014 federal taxes and the total amount of the excess APTC must be repaid by April 15^th. The notice states that interest will accrue on unpaid balances if not paid by the due date.

For purposes of this Notice, taxpayers will be treated as current with their filing and payment obligations if as of the date they file their 2014 income tax returns, they (i) have filed, or filed an extension for, all currently required federal tax returns, and (ii) paid or have entered into an installment agreement (which is not in default), an offer in compromise, or both to satisfy a federal tax liability. – Notice 2015-9

Requesting relief from the IRS

Unfortunately, this penalty relief does not seem to be automatic – the taxpayer still has to jump through a hoop. If the taxpayer is assessed an under payment penalty, then they have to respond with a request for relief from the payment penalty.

Procedure for Claiming Penalty Relief

Requesting relief from the failure to pay penalty

Generally, the Service automatically assesses the § 6651(a)(2) penalty against taxpayers and sends a notice demanding payment. When responding to such a notice, taxpayers should submit a letter to the address listed in the notice that contains the statement:

“I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.”

Taxpayers who file their returns by April 15, 2015 will be entitled to relief under this Notice even if they have not fully paid the underlying liability by the time they request relief.

Taxpayers who file their returns after April 15, 2015 must fully pay the underlying liability by April 15, 2016 to be eligible for relief under this Notice.” – Notice 2015-9

Unforeseen consequences

The underpayment penalty is one of those unforeseen consequences of enacting a complicated program such as the ACA that spans across multiple agencies and the IRS. Undoubtedly other tax or eligibilities problems will pop to the surface as the ACA fully unfolds across America. At least the IRS can make some adjustments to help families from a nasty tax penalty without having to request intervention from Congress.

Download IRS Notice 2015-9 Penalty Relief Related to Advance Payments of the Premium Tax Credit for 2014

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