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IRS Announces Penalty Relief Relating to Premium Tax Credit Advance Payments.

(Parker Tax Publishing January 30, 2015)

The IRS has announced limited relief from tax penalties for 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. This relief applies only for the 2014 tax year. Notice 2015-9.

Practice Aid: See Parker's SAMPLE CLIENT LETTER for tax practioners:
Request Penalty Relief for Failure to File Penalty Relating to Premium Tax Credit Requesting relief under Notice 2015-9 from Code Sec. 6651(a)(2) penalty for failure to pay tax relating. As discussed under "Procedure for Requesting Penalty Relief" below, the letter is to be sent in response to receiving a penalty notice after a taxpayer's 2014 return is filed.

Practice Aid: See Parker's SAMPLE STATEMENT:
Requesting Penalty Waiver: Underpayment of Estimated Tax Penalty Relating to Premium Tax Credit This can be attached to a client's 2014 Form 1040 requesting a waiver under Notice 2015-9 of the Code Sec. 6654(a) penalty for underpayment of estimated tax.

Background

Beginning in 2014, eligible individuals who are covered under a qualified health plan through a Health Insurance Marketplace, are allowed a premium tax credit under Code Sec. 36B. Taxpayers generally receive advance payments of the premium tax credit to assist in paying for their health insurance. These 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 and is based on his or her projected household income and family size.

Under Reg. Sec. 1.36B-4(a)(1)(i), a taxpayer is required to reconcile on his or her tax return the amount of the premium tax credit allowed with the amount of advance credit payments actually received. A difference between the amount of advance credit payments received and the premium tax credit allowed may occur if there were changes in the taxpayer's circumstances during the year, such as getting married or divorced, or having an increase or decrease in income. If advance credit payments are more than the premium tax credit allowed, the difference is treated as additional tax and may result in either a smaller refund or a larger balance due. If the premium tax credit allowed is more than the advance credit payments made, the excess credit amount may result in a larger refund or lower balance due. 2014 is the first year where taxpayers will have to reconcile advance credit payments with the premium tax credit.

Penalty Relief for 2014

Some taxpayers who, because of a difference in their advance credit payments and the premium tax credit calculated on their returns, have an increase in their tax liability may not be able to pay by the due date, generally April 15. Taxpayers who do not pay their entire tax liability generally would be liable for the Code Sec. 6651(a)(2) penalty for failure to pay.

Additionally, some taxpayers may discover that their estimated tax payments made throughout the year were understated due to the difference in the advance payments received and premium credit allowed, potentially leading to a Code Sec. 6654(a) estimated tax penalty. In consideration of these factors, the IRS is providing relief from the Code Sec. 6651(a)(2) and Code Sec. 6654(a) penalties for taxpayers who satisfy certain requirements.

The IRS will abate the Code Sec. 6651(a)(2) penalty for 2014 for taxpayers who (1) are otherwise current with their filing and payment obligations; (2) have a balance due for 2014 due to excess advance payments of the premium tax credit; and (3) report the amount of excess advance credit payments on their timely filed 2014 tax return, including extensions.

Additionally, the IRS will waive the Code Sec. 6654 penalty for 2014 for an underpayment of estimated tax for taxpayers who have an underpayment attributable to excess advance credit payments if the taxpayers (1) are otherwise current with their filing and payment obligations; and (2) report the amount of the excess advance credit payments on a timely filed 2014 tax return, including extensions.

Caution: The relief provided by the IRS does not apply to any underpayment of the individual shared responsibility payment resulting from the application of Code Sec. 5000A because such underpayments are not subject to either the Code Sec. 6651(a)(2) penalty or the Code Sec. 6654(a) penalty. Additionally, the relief granted does not extend the time to file a return and does not alleviate taxpayers of the requirement to pay interest on balances due.

Taxpayers are considered current with their filing and payment obligations if, by the time they file their 2014 income tax returns, they (1) have filed, or filed an extension for, their required federal tax returns, and (2) paid or have entered into an installment agreement, an offer in compromise, or both to satisfy a federal tax liability. If a taxpayer has not paid a tax due because there is a genuine ongoing dispute with the IRS, the amount of tax in dispute will be treated as being current during the dispute.

Procedure for Claiming Penalty Relief

Generally, the IRS automatically assesses the Code Sec. 6651(a)(2) penalty against taxpayers and sends a notice demanding payment. If a taxpayer eligible for relief receives such a notice, he or she should submit a letter to the address listed in the notice with 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. However, interest will still accrue until the underlying liability is fully paid.

To request a waiver of the Code Sec. 6654(a) penalty, taxpayers should check box A in Part II of Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, 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, or 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 calculate the amount of penalty for the penalty to be waived.

For a discussion of the premium tax credit, see Parker Tax ¶ 102,610. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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