This month, the IRS made several updates to the Internal Revenue Manual (IRM) that provide insight on the notices and enforcement methods the Service will use next tax season to ensure taxpayers comply with the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. Most compliance efforts focus on the premium tax credit and the individual shared-responsibility payment.
PPACA will affect 2014 returns
Under PPACA, taxpayers who are enrolled in a marketplace health insurance plan may be entitled to receive a Sec. 36B premium tax credit, depending on family size and income. Taxpayers eligible for the premium tax credit can choose to receive it in two ways:
- Advance payments that are sent monthly to the taxpayer’s insurance company (also called advance premium tax credits); or
- A refundable credit claimed on the tax return.
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 as many as 8 million taxpayers.
Additionally, under Sec. 5000A, taxpayers who do not obtain minimum essential coverage are subject to a penalty, called the individual shared-responsibility payment (ISRP).
The recent IRM updates shed light on specific PPACA-related issues that the IRS is anticipating, as well as IRS compliance efforts that will result. 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 ISRPs—a penalty that, under Sec. 5000A(g), the IRS cannot collect using liens and levies.
New 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 health insurance marketplace. 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 was not reported on a taxpayer’s return and prompt the taxpayer for correction.
The IRS is anticipating three early PPACA-related issues:
1. Premium tax credit calculation errors
For 2014 returns, taxpayers will compute their allowable amount of premium tax credit on Form 8962, Premium Tax Credit (PTC), based on their household income and family size. 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 (usually, a CP 11 or CP 12). The IRS has authority to adjust the return under Sec. 6213(b), which allows the IRS 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 the family size differs from the number of exemptions claimed on Form 1040, line 6d. The effective result would be a premium tax credit recomputation.
The updated IRM (§220.127.116.11.18.104.22.168) lists 26 of the allowed computational error adjustments related to premium tax credits. If the IRS adjusts a taxpayer’s return, resulting in a recomputed premium tax credit amount, the taxpayer has 60 days to contest the change. After the 60-day deadline, the taxpayer must file an amended return with the IRS to contest the change
The IRS can also conduct mail audits on returns with potential premium tax credit errors when the IRS 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 a health insurance marketplace plan, the IRS can freeze the 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:
- CP 06, Exam Initial Contact Letter – PTC – Refund Frozen; or
- CP 06A, 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 making a determination on the accuracy of the premium tax credit claimed.
2. Advance premium tax credit reconciliation discrepancies
For taxpayers who choose to receive advance payments of the premium tax credit, the payments are made on a monthly basis directly to the taxpayer’s insurance company to help with premiums throughout the year.
The IRS calculates advance premium tax credit amounts based on the taxpayer’s estimates of yearly income and family size, provided at the time of enrollment in a health insurance marketplace plan. At 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. In fact, because advance premium tax credit amounts are based on estimates, most taxpayers who choose to receive it will end up with a computational difference at the end of the year.
Taxpayers who experienced changes in circumstances throughout the year and did not report the changes to the marketplace may have to repay excess money from advance premium tax credit payments made to their insurance company that were based on prior estimates. And some taxpayers may get a refund because they did not receive their full amount of premium tax credit for the year or chose not to receive the full amount.
Advance premium tax credit reconciliation will affect millions of taxpayers, starting in the 2014 filing season. According to the latest Congressional Budget Office estimates, 80% of people enrolling in a plan through the health insurance marketplaces will receive a tax credit. And it is likely that most of these taxpayers will choose to receive advance premium tax credit payments to afford premiums.
For 2014 returns, taxpayers who receive advance premium tax credit payments will use Form 8962 to report the specific amounts that were paid to their insurance company, and to reconcile the total amount of those payments with the total amount of premium tax credit they are eligible for.
To fill out Form 8962, taxpayers will use Form 1095-A, Health Insurance Marketplace Statement, an information statement that will list monthly advance premium tax credit amounts sent 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 any 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, any refund is frozen or partially frozen, and the return is referred to IRS compliance—which will result in a correspondence audit.
The IRS can collect any unpaid premium tax credit amounts using its standard deficiency procedures. This is in contrast to restrictions on collecting the ISRP penalty, which is imposed on taxpayers who don’t obtain minimum essential coverage and don’t qualify for an exemption.
3. ISRP assessments and collection
Under PPACA, taxpayers with insurance can indicate that all members of their household had health coverage for the entire year on Form 1040, line 61 (“Full-year coverage” box). Alternatively, taxpayers can use Form 8965, Health Coverage Exemptions, to indicate an exemption from health coverage. However, if the full-year coverage box is not checked on Form 1040, and if a Form 8965 is not filed, the IRS will assess an ISRP.
In the updated IRM (§22.214.171.124), the IRS provides details on how it will collect ISRP assessments. Under Sec. 5000A(g), the IRS cannot collect the ISRP using traditional enforcement methods, such as liens and levies. As a result, the IRS will separate ISRP assessments from regular income tax assessments. To collect ISRP 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 CP 15H, Shared Responsibility Payment (SRP) Civil Penalties Notice, or the CP 21H/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 the ISRP by using refund offset procedures taking all or a portion of any taxpayer refund (see new IRM §126.96.36.199.2.16.8). The IRS can continue to offset taxpayer refunds until the entire ISRP has been paid (IRM §188.8.131.52.11).
This early focus is only the beginning of IRS compliance efforts related to PPACA. For the 2014 filing season, the IRS will cover the basics: proper premium tax credit/advance premium tax credit reporting and ISRP 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.
—Andrew Phillips (
) is program director of tax research at The Tax Institute at
H&R Block. Lindsey Buchholz (
) is principal tax research analyst at The Tax Institute at
H&R Block. Jennifer Villarino (
) manages IRS practice and procedure content development at
H&R Block. Jim Buttonow (
) directs tax practice and procedure product development at