The IRS Provides Penalty Relief for Overpayment of ACA Tax Credits
A new bulletin from the Internal Revenue Service details what happens to taxpayers who were accidentally awarded too large of a tax credit from the premiums they paid on insurance policies purchased through the Affordable Care Act during the 2014 tax year. It does not allow households to avoid paying the relevant tax balance, but it does enable them to avoid paying any late fees on the part of their tax balance related to drawing more advance payment than they were entitled to use.
The bulletin is Notice 2015-09. If a taxpayer has a tax balance due as a direct result of matching up advances on their premium tax credit with the maximum amount of premium tax credit allowed for the 2014 tax year, they can get partial relief from the IRS. This relief takes the form of exemption from paying the penalty for the late payment of a tax balance and the penalty for underpayment of the estimated tax burden of an individual. The late fee is covered under Section 6651(a)(2) of the tax code, and the underpayment penalty is covered under Section 6654(a).
2014 was the first tax year in which some American households could qualify for a special tax credit on their healthcare premiums, as long as they bought their plan through one of the state or federal health insurance exchanges. The taxpayers could opt to receive some of the tax credit in advance and have it applied directly to the premium. The amount of the tax credit is determined at the time taxpayers sign up for their insurance plans.
During tax season, taxpayers need to reconcile the amount of the advance payments they obtained with the maximum tax credit to which they were entitled. If their income and family size changed during the year, there could be a discrepancy, where the amount that the taxpayers obtained as advance payments exceeds the maximum amount of tax credit to which they were actually entitled for the 2014 tax year.
In this situation, the amount of the advance payment over the maximum for the year would become money owed to the federal government as tax. This amount would reduce the refund or increase the balance for the taxpayer.
The IRS is allowing for special tax relief to help taxpayers avoid having to pay late fees on this unexpected extra tax bill or fees for having underestimated their withholding. This is because 2014 was the first year that required households to perform this reconciliation process for health care tax credits, so many were unprepared. The households in question need to be current on all other tax balances and need to report discrepancies to the IRS in a timely manner on their 2014 tax return forms.
The amount of time that a household has to file their taxes has not changed. The household still has the option to file for an extension on their taxes. For the purposes of being current with their balances, a household that has obtained an extension or is working on a payment plan is considered to be current.
The deadline for filing taxes is April 15. Filing taxes after this date will result in interest fees being applied to the tax balance. This cannot be avoided, even with the new rule about the health care premium tax credit. The notice only applies to the late fees in Section 6651 or the underestimation fees in Section 6654.
To obtain the tax relief, the household needs to fill out special forms. For a Section 6651 penalty, the household will receive an automatic form letter from the IRS asking for payment of the overdue balance and the fee. The household should reply to the letter with a statement that says, “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.” For a Section 6654 fee, the filing taxpayer needs to get a copy of Form 2210, check Box A in Part II, fill out the whole first page, and then send in the form and attach a letter with the above statement claiming relief.
This notice does not absolve households of the responsibility of paying back the excess advance payment of the tax credit. Instead, it gives them extra time to pay back the money by removing the biggest penalties and fees that they might face while they obtain the funds to pay the IRS. The household still needs to pay any other tax balances due, and these other balances are not subject to the relief outlined in the notice.
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