Penalty Relief: Overpayment of ACA Tax Credits

Beginning in 2014, an eligible individual or family member covered under a qualified health plan through a Health Insurance Marketplace (Exchange) is allowed a premium tax credit.

The premium tax credit offsets the cost of premiums paid for healthcare coverage in a qualified health plan. It is unusual in that taxpayers are able to take advantage of the credit in advance of filing an income tax return for the taxable year of coverage.

Advance credit payments are made directly to the insurance provider. The amount of the advance credit payments is determined when an individual enrolls in a qualified health plan through an Exchange and is based on projected household income and family size for the year of coverage.

When a taxpayer claims the credit on their income tax return the amount of premium tax credit allowed on the tax return (based on actual household income and family size for the year of coverage) must be reconciled, or compared, with advance credit payments.

Taxpayers who have a balance due on their 2014 income tax return as a result of reconciling advance payments of the premium tax credit against the premium tax credit allowed on the tax return have been granted penalty relief by the IRS.

This relief applies only to tax year 2014 and does not apply to any underpayment of the individual shared responsibility payment.

Penalties

Two types of penalties may be imposed by the IRS. The first is a failure-to-pay penalty (unless granted relief for reasonable cause) and applies to taxpayers who do not pay tax due by the April 15 filing date. The second is a penalty for failure-to-pay estimated tax and applies to taxpayers who underpay tax as a result of reconciliation.

With regard to failure-to-pay estimated tax, generally, taxpayers are required to make tax payments on nonwage income in quarterly installments. An underpayment of estimated tax is the excess of the required quarterly estimated tax payment over the amount actually paid on or before the due date for the payment.

Most taxpayers are able to avoid this penalty if they owe less than $1,000 in tax on their 2014 income tax return after subtracting their withholding, or if their withholding and estimated taxes total at least 90 percent of the tax for taxable year 2014 or 100 percent of the tax shown on their 2013 taxable year return.

To qualify for IRS penalty relief, taxpayers must meet certain requirements:

  • Taxpayers must be current with their filing and payment obligations;
  • Taxpayers must have a balance due for tax year 2014 due to excess advance payments of the premium tax credit; and
  • Taxpayers must report the amount of excess advance credit payments on their 2014 tax return timely filed, including extensions.

Requesting relief from the failure-to-pay penalty

Generally, the IRS automatically assesses the penalty against taxpayers and sends a notice demanding payment. When responding to such a notice, taxpayers should submit a letter to the address listed in the notice that contains the statement: "I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit."

Taxpayers who file their returns by April 15, 2015 will be entitled to relief even if they have not fully paid the underlying liability by the time they request relief.

Taxpayers who file their returns after April 15, 2015 must fully pay the underlying liability by April 15, 2016 to be eligible for relief. Interest will accrue until the underlying liability is fully paid.

Requesting relief from the failure-to-pay estimated tax penalty

To request a waiver of the failure-to-pay estimated tax, taxpayers should check box A in Part II of Form 2210, complete page 1 of the form, and include the form with their return, along with the statement: "Received excess advance payment of the premium tax credit."

Taxpayers do not need to attach documentation from the Exchange, explain the circumstances under which they received an excess advance payment or complete any page other than page 1 of the Form 2210. Taxpayers also do not need to figure the amount of penalty for the penalty to be waived.

If you have any questions about penalty relief for overpayment of ACA premium tax credits, please call.