In September 2014, the IRS made several updates to the Internal Revenue Manual (IRM) that provide insight on the notices and enforcement methods the Service will use this tax season to ensure taxpayers comply with the Patient Protection and Affordable Care Act (PPACA). 1 Most of these compliance efforts focus on the premium tax credit and the individual shared-responsibility payment ("individual mandate"). The IRS is anticipating three early PPACA-related issues: premium tax credit calculation errors, advance premium tax credit reconciliation discrepancies, and problems with individual mandate penalty assessments and collection.
Under PPACA, taxpayers who are enrolled in a plan through the Health Insurance Marketplace (also known as an exchange) may be entitled to receive a Sec. 36B premium tax credit, depending on family size and income. For each month of coverage through a marketplace, taxpayers can qualify for a premium tax credit equal to the lesser of (1) the monthly premiums for such coverage of the taxpayer, spouse, and dependents, or (2) the excess, if any, of the adjusted monthly premium of the applicable "benchmark" plan 2 over one-twelfth of the taxpayer's household income multiplied by the taxpayer's applicable percentage (which ranges from 2% to 9.5%, depending on the taxpayer's household income as a percentage of the federal poverty line). 3
Taxpayers eligible for the premium tax credit can choose to receive it either as advance payments that are sent monthly to the taxpayer's insurance company (also called "advance premium tax credits") or as a refundable credit claimed on the tax return. Taxpayers who received advance credits must reconcile them with their premium tax credit for the year on their return and claim any additional credit they are entitled to or repay any excess advance credit they received.
The IRS requires the premium tax credit to be properly reported on 2014 tax returns, with new line items and forms. This requirement could affect most of the 7.1 million individuals who had enrolled in coverage through an exchange through October 2014. 4Shared-Responsibility Payment
Additionally, under Sec. 5000A, individual taxpayers and their dependents must maintain minimum essential coverage 5 for each month of the year or pay a penalty called the individual shared-responsibility payment, unless they are exempt from the requirement. The penalty is the lesser of (1) the sum of "monthly penalty amounts" for the tax year, or (2) the national average premium amount for "bronze" level 6 exchange coverage of the applicable family size. 7 The monthly penalty amount is one-twelfth of the greater of (1) a flat dollar amount that is the lesser of the sum of the applicable dollar amount 8 for each individual in the family without coverage or 300% of the applicable dollar amount for the calendar year with or within which the tax year ends, or (2) a percentage of the taxpayer's household income for the year above the applicable gross income threshold requiring the taxpayer to file an income tax return. 9
Recent IRM updates shed light on specific PPACA-related issues that the IRS is anticipating, as well as resulting IRS compliance efforts. The new IRS efforts will focus mainly on correcting return errors at the time of filing. Additionally, IRM updates provide a glimpse into how the IRS will collect unpaid individual shared-responsibility penalties—which it cannot collect using liens and levies. 10New Database Enables Preliminary Checks
The cornerstone of PPACA filing compliance programs is the new Coverage Data Repository (CDR), a database of insurance information from the exchanges. With this new data feed, the IRS can check returns at the time of filing for premium tax credit qualification and advance payments of the premium tax credit. For example, the IRS might detect an advance premium tax credit amount that a taxpayer did not report on his or her return and prompt the taxpayer for correction.Premium Tax Credit Calculation Errors
Taxpayers will compute their allowable premium tax credit on Form 8962, Premium Tax Credit (PTC), as described above. If a taxpayer incorrectly computes the premium tax credit amount, the IRS can adjust the entry on the return and send the taxpayer a notice indicating that a change was made to the return (likely, a CP11 or CP12). The IRS has authority to adjust the return under Sec. 6213(b), which allows it to correct specific types of clerical or computational errors on a return. For example, the IRS can correct the family size entry on Form 8962, line 1, used to calculate premium tax credit eligibility, when it differs from the number of exemptions claimed on Form 1040, U.S. Individual Income Tax Return, line 6d, resulting in a premium tax credit recomputation.
The updated IRM lists 26 of the allowed computational error adjustments related to premium tax credits. 11 If the IRS adjusts a taxpayer's return, resulting in a recomputed premium tax credit amount, and sends the taxpayer a notice, the taxpayer has 60 days from the date of the notice to contest the change. After the 60-day deadline, the adjustments will not be reversed. If the taxpayer does not agree with the adjustment, he or she must pay the additional tax and file an amended return to request a refund. The adjustment does not have to be challenged in writing; taxpayers can do so by calling the number on the IRS notice.
The IRS can also conduct correspondence audits on returns with potential premium tax credit errors when it has third-party information indicating that the taxpayer is not eligible for the premium tax credit as claimed. For example, if a taxpayer claims the premium tax credit but the CDR database indicates that the taxpayer never enrolled in an exchange plan, the IRS can freeze any refund and prioritize the return for examination. The IRS has developed new notices and a new form for premium tax credit mail audits.
The IRS will notify taxpayers that their return is being audited and that their refund will be held pending the audit (if applicable) by sending either of the following notices: 12
- CP06, Exam Initial Contact Letter — PTC — Refund Frozen; or
- CP06A, Exam Initial Contact Letter — PTC — Bal[ance] Due.
The IRS will enclose the new Form 14950, Premium Tax Credit Verification, with the notices to request documentation proving that the taxpayer qualifies for the premium tax credit. The IRS then would follow standard audit procedures in determining the accuracy of the premium tax credit claimed.Advance Premium Tax Credit Reconciliation
The IRS calculates advance premium tax credit amounts based on taxpayers' estimates of income and family size for the year provided at the time they enroll in an exchange plan. After the end of the year, when the taxpayer files a return, the total amount of premium tax credit that the taxpayer was actually eligible for is calculated based on the taxpayer's actual circumstances for the year. These circumstances include marital status, dependents, and income, which can often change. 13 Consequently, many taxpayers with advance credits could end up with a computational difference at the end of the year.
Taxpayers who experienced changes in circumstances during the year decreasing their eligible credit amount and who did not report the changes to the exchange may have to repay excess advance premium tax credit payments, subject to limits for taxpayers with household incomes below 400% of the federal poverty line. 14 And some taxpayers may get a refund because the full amount of advance premium tax credit for which they were eligible was not paid.
Advance premium tax credit reconciliation will affect millions of taxpayers, starting in the 2015 filing season. According to the latest Congressional Budget Office estimates, more than 80% of people enrolling in a plan through an exchange were eligible for a tax credit for 2014. 15 And most of these taxpayers likely chose advance premium tax credit payments to afford premiums.
Taxpayers for whom advance premium tax credit payments were made will use Form 8962 to report them and to reconcile the total amount of those payments with the premium tax credit they are eligible for. To fill out Form 8962, these taxpayers will use Form 1095-A, Health Insurance Marketplace Statement, an information statement that will list monthly advance premium tax credits paid to the taxpayer's insurance company. The form will be sent to taxpayers by Jan. 31. If the IRS finds a discrepancy between the amounts listed on Form 8962 and the amounts reported in CDR data feeds, the IRS will freeze all or part of any taxpayer refund and send Letter 12C, Individual Return Incomplete for Processing: Form 1040, Form 1040A and 1040EZ, to the taxpayer to resolve the discrepancy. If the discrepancy is resolved, the return continues through processing. If not, the return is processed as filed and is referred to IRS compliance—which will result in a correspondence audit. 16
The IRS can collect any unpaid excess premium tax credit or advance credit amounts using its standard deficiency procedures, in contrast to the restrictions on collecting the individual shared-responsibility payment.
The following example illustrates a complication that could result from reconciliation of advance payments of the premium tax credit.
Example 1: J files her 2014 Form 1040 on April 15, 2015. Throughout the year, advance payments of the premium tax credit were made directly to her insurance company. On Form 8962, J reports the total amount of advance payments she received for the year. The IRS processes J's return and matches the return against its CDR data feed. The amount of advance payments of the premium tax credit reported on J's return differs from the amount reported to the IRS through its CDR data feed. The IRS freezes all or a part of J's refund and sends J a notice (Letter 12C) in mid-May to request that J address an error on her return. After receiving the notice, J realizes that she received two Forms 1095-A because she had a separate insurance policy for her dependent child but reported the amounts from only one of them. J contacts the IRS to confirm the adjustment. The IRS keeps the portion of J's refund attributable to the reconciliation error.
If J had owed additional tax as a result of the reconciliation error, she would have had to make arrangements to pay the IRS. If she did not pay, the IRS could use its normal collection options.Individual Shared-Responsibility Payment Assessments and Collection
Taxpayers with minimum essential coverage for each month of the year for all members of their family can indicate it on Form 1040, line 61 ("full-year coverage" box). Alternatively, taxpayers can use Form 8965, Health Coverage Exemptions, to claim one or more exemptions from health coverage. If the full-year coverage box is not checked on Form 1040, and a Form 8965 is not filed, the IRS will accept the return as filed but may further scrutinize it.
As of this writing, the IRS had not yet published enforcement procedures for assessing the penalty on these returns. If the IRS pursues apparent noncompliance for 2014 returns, it will likely have to resort to mail audit procedures because it will not have the information to calculate the penalty or the authority to correct the penalty amount at filing. 17
In the updated IRM, the IRS provides details on how it will collect individual shared-responsibility payment assessments. 18 Because, under Sec. 5000A(g), the IRS cannot collect the penalty using liens and levies, the IRS will separate assessments for it from regular income tax assessments. 19 To collect the penalty assessments for 2014, the IRS will send a new series of assessment and collection notices (the "H notices").
The first notice of assessment will likely be a CP15H, Shared Responsibility Payment (SRP) Civil Penalties Notice, or the CP21H/22H, Shared Responsibility Payment (SRP) Adjustment Notice. If the taxpayer does not pay the penalty, the IRS will continue to issue a series of H notices requesting payment. The new IRM section also confirms that if the penalty remains unpaid, the IRS intends to collect it by using refund offset procedures. 20 The IRS can continue to offset taxpayer refunds until the entire penalty has been paid. 21
The following example demonstrates a complication that could result from the individual shared-responsibility payment.
Example 2: B files his 2014 Form 1040 and does not check the full-year coverage box on line 61, effectively indicating to the IRS that he did not have full-year coverage. B also does not calculate an individual shared-responsibility payment, sends no payment, and claims no exemption from health insurance coverage.
The IRS does not reject B's return and accepts it as filed. However, the return could be subject to future scrutiny. If the IRS makes an adjustment to B's return, the Service will send him notices to collect the individual shared-responsibility payment. If B does not respond, the IRS can offset B's 2015 and subsequent refunds to collect the penalty.
This early focus is only the beginning of IRS compliance efforts related to PPACA. For the 2015 filing season, the IRS will cover the basics: proper premium tax credit/advance premium tax credit reporting and individual shared-responsibility payment assessments. In the future, as the IRS gains more experience and data related to health care coverage, it will expand its capabilities to enforce PPACA compliance.
1 Patient Protection and Affordable Care Act, P.L. 111-148.
2 See Regs. Sec. 1.36B-3(f).
3 Secs. 36B(b)(2) and (b)(3)(A).
5 Defined at Sec. 5000A(f).
6 A bronze-level plan covers 60% of total average costs of benefits covered under such a plan.
7 Regs. Sec. 1.5000A-4(a).
8 The applicable dollar amount for these purposes is $95 for 2014, $325 for 2015, and $695 for 2016.
9 Sec. 5000A(c). The percentage is 1% for tax years beginning in 2014, 2% for tax years beginning in 2015, and 2.5% for tax years beginning after 2015.
10 Sec. 5000A(g).
11 IRM §22.214.171.124.126.96.36.199.
12 IRM §188.8.131.52.3.
14 Sec. 36B(f)(2)(B). For 2014, the limitation is $600 for household income less than 200% of the federal poverty line, $1,500 for income above 200% but less than 300% of the poverty line, and $2,500 for income above 300% but less than 400% of the poverty line.
15 Congressional Budget Office, Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act, April 2014, Table 3, p. 10, available at www.cbo.gov. The CBO estimated that there would be 6 million enrollees in marketplaces in 2014 and about 5 million would be eligible for an advance premium tax credit.
16 IRM §184.108.40.206.2.16.3.
17 Insurers will report coverage to insureds and the IRS under Sec. 6055 on new Form 1095-B, Health Coverage, but transition relief delayed the effective date of this requirement by one year until coverage year 2015.
18 IRM §§220.127.116.11.12.1, 18.104.22.168.19.1, and 22.214.171.124.20.1.
19 The IRS also cannot assess other penalties on a taxpayer's failure to comply with the requirement to make an individual shared-responsibility payment. However, interest will accrue on unpaid payment amounts.
20 IRM §126.96.36.199.2.16.8.
21 IRM §188.8.131.52.11(2).
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