IRS signals PPACA compliance issues.

• Author: Phillips, Andrew
• Position: Patient Protection and Affordable Care Act

In September 2014, the IRS made several updates to the Internal Revenue Manual (IRM) that provide insight on the notices and enforcement methods the Service will use this tax season to ensure taxpayers comply with the Patient Protection and Affordable Care Act (PPACA). (1) Most of these compliance efforts focus on the premium tax credit and the individual shared-responsibility payment ("individual mandate"). The IRS is anticipating three early PPACA-related issues: premium tax credit calculation errors, advance premium tax credit reconciliation discrepancies, and problems with individual mandate penalty assessments and collection.

Premium Tax Credit and Advance Credit

Under PPACA, taxpayers who are enrolled in a plan through the Health Insurance Marketplace (also known as an exchange) may be entitled to receive a Sec. 36B premium tax credit, depending on family size and income. For each month of coverage through a marketplace, taxpayers can qualify for a premium tax credit equal to the lesser of (1) the monthly premiums for such coverage of the taxpayer, spouse, and dependents, or (2) the excess, if any, of the adjusted monthly premium of the applicable "benchmark" plan (2) over one-twelfth of the taxpayer's household income multiplied by the taxpayer's applicable percentage (which ranges from 2% to 9.5%, depending on the taxpayer's household income as a percentage of the federal poverty line). (3)

Taxpayers eligible for the premium tax credit can choose to receive it either as advance payments that are sent monthly to the taxpayer's insurance company (also called "advance premium tax credits") or as a refundable credit claimed on the tax return. Taxpayers who received advance credits must reconcile them with their premium tax credit for the year on their return and claim any additional credit they are entitled to or repay any excess advance credit they received.

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 most of the 7.1 million individuals who had enrolled in coverage through an exchange through October 2014. (4)

Shared-Responsibility Payment

Additionally, under Sec. 5000A, individual taxpayers and their dependents must maintain minimum essential coverage (5) for each month of the year or pay a penalty called the individual shared-responsibility payment, unless they are exempt from the requirement. The penalty is the lesser of (1) the sum of "monthly penalty amounts" for the tax year, or (2) the national average premium amount for "bronze" lever (6) exchange coverage of the applicable family size. (7) The monthly penalty amount is one-twelfth of the greater of (1) a flat dollar amount that is the lesser of the sum of the applicable dollar amount (8) for each individual in the family without coverage or 300% of the applicable dollar amount for the calendar year with or within which the tax year ends, or (2) a percentage of the taxpayer's household income for the year above the applicable gross income threshold requiring the taxpayer to file an income tax return. (9)

Recent IRM updates shed light on specific PPACA-related issues that the IRS is anticipating, as well as resulting IRS compliance efforts. 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 individual shared-responsibility penalties--which it cannot collect using liens and levies. (10)

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 exchanges. 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...