Problems Arise in Implementing Obamacare on 2014 Income Tax Returns

The Affordable Care Act is an extremely large and complicated law.  Not only are there technical legal issues that are still being resolved, but there are also many compliance problems that have arisen in connection with preparing 2014 individual income tax returns.  The year 2014 is the first time taxpayers must have health insurance for each month of the year or face a tax penalty.  The year 2014 is also the first time that health insurance exchanges operated and provided premium tax credits to offset the cost of health insurance for lower to moderate income taxpayers.  Just like when serious problems arose with the government’s website when it first started, several problems affecting 2014 income tax returns have arisen.

Incorrect Information Reported by Health Insurance Exchange Marketplaces

On February 20^th the government announced that it sent incorrect Forms 1095-A to 800,000 people who enrolled in the Federal exchange.  The form incorrectly used 2015 premium information instead of 2014 information.  Corrected forms will be sent in March.  The form is used to compute the proper amount of the premium support tax credit.  If too much credit is claimed it must be repaid.  If too little credit was received it can be claimed on the tax return.  The government estimates that some people who have already filed their 2014 income tax returns using the erroneous information will have received too much credit while others will have received too little, expecting to roughly break even.  Therefore the government said that amended tax returns are not required, in an attempt to avoid additional compliance costs to the affected taxpayers, although taxpayers may file amended returns if they wish.

Payback of Excess Premium Support Credits

According to an announcement by H&R Block, 52% of their customers are required to repay part of their tax credit subsidies used to purchase health insurance on the exchange.  The average payback is $530 which is treated as an additional tax on the income tax return.  This has been a surprise to many of their customers who were counting on higher refunds.

Estimated Tax Payment and Late Payment Penalty Relief

The IRS issued Notice 2015-9 where it announced penalty relief for taxpayers who must repay excess premium support credits and who have a balance owing on their tax returns.  Many taxpayers are now realizing that they must repay excess credits if they understated their estimate of 2014 income when they applied for premium tax credits.  The government is heading off complaints by granting relief from late payment and estimated tax payment penalties if the taxpayer can’t pay the tax due by April 15, 2015.  In order to qualify for the relief, taxpayers must file their tax return on time showing the amount of the excess credit, and they must not otherwise be delinquent with their prior tax filings and payment obligations.  The Notice indicates that IRS computers will bill the late payment penalty and that the taxpayer must respond to the billing notice with the phrase, “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.”  To obtain relief from the estimated tax payment penalty, which is computed as part of the 2014 tax return, taxpayers should check box A in Part II of Form 2210, complete page 1, and include a statement with the form:  “Received excess advance payment of the premium tax credit.”  Interest will still be charged on amounts paid after April 15^th.