Assessment of tax for excess APTC payments is invalid

The Tax Court held that the IRS’s assessment of tax related to taxpayers’ excess advance premium tax credit (APTC) payments was invalid because the IRS did not issue a notice of deficiency before making the assessment.

Background

Kenneth and Juli Walker timely filed a 2018 joint Form 1040, U.S. Individual Income Tax Return, reflecting a household of four, adjusted gross income of $110,599, and a refund due of $2,143. Although the Walkers purchased insurance through a health insurance marketplace in 2018, their original tax return did not include a Form 8962, Premium Tax Credit (PTC), or Form 1095–A, Health Insurance Marketplace Statement.

The IRS informed the Walkers in 2019 that their original return was missing the two forms and requested they submit them. The Walkers sent the forms to the IRS, reporting on the Form 8962 household income of $110,599, a federal poverty line for their household size of $24,600, household income of at least 401% of the federal poverty line, total APTC payments of $20,904 received, and excess APTC payments of the same amount.

Because the Walkers’ income was greater than 400% of the applicable poverty line, they were not entitled to any PTC and therefore were required to pay back all of the $20,904 of the excess APTC payments. In 2020, following its internal procedures, the IRS adjusted the Walkers’ 2018 tax return and made an additional tax assessment of $20,904. However, the IRS did not issue a notice of deficiency for the additional assessment.

In 2021, the IRS issued a notice of intent to levy seeking to collect the Walkers’ 2018 balance due. The Walkers requested a Collection Due Process (CDP) hearing after receiving the levy notice.

The Walkers’ CDP case was assigned to an Appeals settlement officer (SO), who scheduled a CDP hearing. The Walkers at first requested an installment agreement but later in the proceedings disputed whether the IRS had made a valid assessment. The Walkers claimed that the assessment of the $20,904 of tax related to their excess APTC payments was not valid because it was not shown on their return, was not a summary assessment of a math or clerical error, and the IRS had not issued a deficiency notice before making the assessment.

The Appeals SO issued a notice of determination sustaining the proposed levy. She determined that the assessment was made in accordance with IRS policies and procedures. According to the SO, after the Walkers provided the requested missing forms, the IRS had adjusted their account in accordance with their originally submitted return. The SO also found that the Walkers had failed to provide any documentation to support their claim that the IRS was required to issue a deficiency notice. Thus, the SO determined that, based on the available information, the Walkers’ tax liability for the excess APTC payments was properly assessed and their balance due was “valid, due, and owing.”

The Walkers filed a petition with the Tax Court requesting a review of the Appeals SO’s determination. In its review, the Tax Court considered whether the IRS was legally obligated to issue the Walkers a deficiency notice in assessing the correct amount of tax due related to their excess APTC payments.

Sec. 36B(f)

Sec. 36B(f) requires taxpayers who have received the APTC to reconcile the APTC payments made on their behalf during the year with the amount of the PTC for which they are eligible. Sec. 36B(f)(2)(A) provided during the tax years at issue that if the total APTC payments exceed the amount of the PTC for which a taxpayer is eligible, the taxpayer owes the excess as a tax liability, subject to a repayment limitation in Sec. 36B(f)(2)(B). The repayment limitation applied only to taxpayers whose household income is less than 400% of the federal poverty line (Sec. 36B(f)(2)(B)(i)). Under the limitation, the amount of any tax due because of a taxpayer’s receipt of excess APTC payments was limited to $600, $1,500, or $2,500, depending on the percentage of the taxpayer’s household income above the poverty line (id).

The Tax Court’s decision

The Tax Court held that the IRS’s assessment of the tax related to the Walkers’ excess APTC payments was a deficiency within the meaning of Sec. 6211(a), and the Service therefore was legally required to issue the Walkers a deficiency notice before assessing the tax. Because the IRS did not issue a deficiency notice, it could not proceed with its collection action.

The Tax Court found that the Walkers’ original return did not account for their receipt of the APTC. Upon request by the IRS, the couple furnished a completed Form 8962 that reported their modified adjusted gross income to be $110,599 — more than 401% over the federal poverty line of $24,600. The Form 8962 also reported that the Walkers were not eligible to receive the PTC, and Part III of the form reflected excess APTC payments of $20,904.

However, as the Tax Court explained, the Form 8962 did not ultimately determine an amount of tax due from the Walkers, and their return, as originally filed, failed to account for the PTC. Therefore, upon receipt of information in Form 8962, it was necessary for the IRS to determine whether the Walkers had a deficiency in tax.

The Walkers contended that because the IRS adjusted their 2018 tax return and determined that a deficiency in tax was due, it was therefore obligated to issue a deficiency notice under the deficiency procedures of Secs. 6211 through 6215. The IRS countered that the Walkers reported their own excess APTC repayment and that the Service processed the couple’s Form 8962 with their originally submitted return. Therefore, according to the IRS, under Sec. 6201(a)(1), it merely assessed additional tax due as reported by the Walkers.

The Tax Court noted that Sec. 6201(a) authorizes and requires the IRS to make assessments of all tax (including interest, additional amounts, additions to tax, and assessable penalties) imposed by the Code. If there is a deficiency, the IRS, under Sec. 6213(a), is further required to provide the taxpayer an opportunity for judicial review before assessment. Sec. 6211(a) defines a deficiency as “the amount by which the [income, gift, estate, or excise] tax imposed … exceeds” the excess of the sum of “the amount shown as the tax by the taxpayer upon his return” plus any previously assessed amounts, over “the amount of rebates … made.” The court concluded that “[o]n the basis of the foregoing plain text of the Code, we find that [the Walkers’] legal argument that the Assessment is a deficiency determination under the Code is well supported.”

As the Walkers and the IRS acknowledged, Sec. 36B(f) obligates taxpayers to reconcile the APTC with their allowable PTC on their tax return. However, the Tax Court rejected the IRS’s argument that the Walkers’ completion of Form 8962 reflected additional tax due that might be assessed under Sec. 6201. The court found that this reconciliation does not act as a self–assessment of additional tax, citing as an example Sec. 36B(f)(2)(B)(i), which limited the amount of any tax due for excess APTC payments received by taxpayers whose household income was less than 400% of the federal poverty line. Considering the specific wording of Sec. 36B(f), it concluded that the IRS determined that the Walkers owed additional tax, notwithstanding their original filing, which, the court stated, “is the quintessential definition of a deficiency.”

Reflections

The Tax Court also considered whether the Appeals SO had abused her discretion in making the determination that no deficiency notice was necessary. As the court explained, among other reasons, an Appeals officer commits an abuse of discretion if the officer’s determination is grounded in an error of law. Having held that a deficiency notice was necessary, the court found that the SO’s determination was a legal error. Accordingly, the court held that the SO’s determination was an abuse of discretion.

Walker, T.C. Memo. 2026–4

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.