ObamaCare Premium Tax Credit Penalty Relief

Many taxpayers will not be entitled to a federal income tax refund this spring. Instead, they will have to write a check to the IRS due to freshly implemented rules under the Patient Protection and Affordable Care Act (i.e., ObamaCare). However, a recently published IRS notice gives relief from some tax penalties arising from the ObamaCare advanced premium tax credit payments.

One of ObamaCare’s primary features is the health insurance premium tax credit.  It was enacted to help make health insurance affordable for lower-income individuals who could not access health insurance through other means such as an employer or Medicare. While refundable tax credits are typically paid to a taxpayer in the following spring after a tax return is filed for the prior year, the premium tax credit can be “paid” to the taxpayer throughout the tax year via government payment of health insurance premiums, well before any tax is computed or return is filed. In addition, the amount of the premium tax credit varies significantly depending on the income-level of the taxpayer. The higher the income level of a given taxpayer, the smaller the premium tax credit he or she will receive.

Because the premium tax credit is paid ratably throughout the year and the amount of the credit directly corresponds to the taxpayer’s income, the taxpayer must estimate his or her income for the entire year when initially applying for the credit at the beginning of the year.  This is done so that the government can advance the proper amount of credit to the taxpayer throughout the year (i.e., at the beginning of 2014, a taxpayer must estimate her income for all of 2014). Because advanced credit payments are based off an income estimate, the IRS requires an income reconciliation at he end of the year when filing the tax return. Under the reconciliation rules, any taxpayer who underestimates 2014 income when applying for the premium tax credit in the prior year will owe the government the difference after completing the reconciliation form.

In addition to paying back the difference between the amount of premium tax credit a taxpayer received and the amount of premium tax credit that the taxpayer should have received, the taxpayer might also be liable for the failure to pay penalty and the estimated tax penalty (as well as other penalties). However, in Notice 2015-6 the IRS agreed to abate failure to pay and estimated tax penalties for taxpayers who are unable to repay excess advanced premium tax credit payments from 2014, but only if: (i) the taxpayer is current with all filing and payment obligations other than the amount owing from the 2014 premium tax credit and (ii) the taxpayer timely files the 2014 return which properly reports the excess advanced premium credit.

The IRS will abate a late payment penalty for failure to timely pay tax stemming from the premium tax credit if a taxpayer responds to the IRS notice which imposes said penalty by stating, “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.” In addition, the IRS will abate an estimated tax penalty stemming from premium tax credit advances if the taxpayer includes Form 2210 page one with the rest of the taxpayer’s return and checks box A in Part II on page 1 of the Form 2210. The taxpayer should also write in the statement, “Received excess advance payment of the premium tax credit.” No other documentation or calculation is required according to the IRS notice.

Overall, the premium tax credit will cause some taxpayers sticker shock, but the IRS has created opportunities for taxpayers to reduce or eliminate penalties stemming from the ObamaCare premium tax credit.