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Taxpayers Had to Repay ACA Advance Premium Tax Credit Due to Increase in Income

(Parker Tax Publishing September 2017)

The Tax Court held that a married couple who received a Code Sec. 36B advance premium tax credit, which was paid directly to their health insurance provider to reduce their monthly premiums, had to repay the full amount of the credit because an increase in their income made them ineligible for it. However, the Tax Court determined that a penalty for the underpayment did not apply because the couple reported their increase in income to the state insurance exchange, never received a Form 1095-A, Health Insurance Marketplace Statement, and were not the actual recipients of the payments. McGuire v. Comm'r, 149 T.C. No. 9 (2017).

Steven and Robin McGuire are a married couple who lived in California during 2014, the year at issue. In 2013, the McGuires applied for and received benefits under the Affordable Care Act (ACA). At that time, Mr. McGuire was earning $800 per week from his parts and service business and Mrs. McGuire was not working. California's health insurance exchange, Covered California, determined that the McGuires qualified for an advance premium tax credit (APTC) of almost $600 per month, or approximately $7,000 for the year. The APTC is a monthly payment directly to a health insurance provider that is based on an advance eligibility determination and is intended to reduce premiums for eligible individuals.

The McGuires signed up for an insurance plan with a monthly premium of around $1,200. Their monthly premium was reduced to around $600 after applying the APTC. Later in 2013, after their eligibility determination, Mrs. McGuire began working at a job that paid her $600 per week. She promptly notified Covered California that the additional income needed to "be included in our annual income." The change was significant because 400 percent of the federal poverty line for a family of two living in California at the time was around $62,000. The additional income was almost certain to put the McGuires over that limit, in which case they would not be entitled to any of the APTC.

Covered California acknowledged the change in income several months later in a June 2014 letter advising the McGuires that they did not qualify for their current health plan because their income was too high. The letter also stated that the McGuires may have to pay back some of the premium assistance when they filed their 2014 tax return. However, the McGuires never received the letter. According to Covered California, it was so busy during its first open enrollment period that it was common for changes to not be implemented. The McGuires made repeated efforts to get Covered California to take into account the change in income but it never did so. The McGuires also attempted to change their address with Covered California after they moved but Covered California did not update their address. As a result, they never received a Form 1095-A, Heath Insurance Marketplace Statement, which is used to calculate the premium tax credit.

The McGuires hired an accountant to prepare their 2014 return. The return reported that they had health insurance throughout the year, but the line for the net premium tax credit was left blank and the McGuires did not report the $7,000 APTC. In 2016, the McGuires received a notice of deficiency disallowing the APTC, which increased their tax liability in the amount of the disallowed credit. An accuracy related penalty was also applied. The McGuires petitioned the Tax Court for review.

The McGuires argued that it was Covered California's responsibility to ensure that clients received only the APTC amount for which they qualified, and that they would have never signed up for medical coverage costing $14,000 per year. They considered themselves to be trapped in a plan they could not afford without the subsidy provided by the ACA and asked the Tax Court to rule fairly and justly.

The Tax Court held that the McGuires owed the IRS the full amount of the $7,000 APTC. The Tax Court reasoned that the McGuires were asking it to provide equitable belief, but that it is not a court of equity and could not ignore the law to achieve an equitable end. It was clear to the Tax Court that the excess ATPC was an increase in the tax imposed under Code Sec. 36B(f)(2)(A). The McGuires received an advance credit for which they did not qualify and were therefore liable for the deficiency.

However, the Tax Court held that because the McGuires had acted reasonably and in good faith with respect to the underpayment, the penalty under Code Sec. 6662 did not apply. The court noted that the McGuires' understatement was substantial because it exceeded the greater of 10 percent of the tax required to be shown on the return or $5,000. However, the Tax Court reasoned that the McGuires never received a Form 1095-A, and although they received a benefit in the form of the APTC, it was the insurance company and not the McGuires that received the payments. The Tax Court found that the McGuires therefore did not have notice that they were receiving taxable income. They reported their changed circumstances to Covered California and relied on it to properly determine and adjust their eligibility for the tax credit. Moreover, the McGuires relied on a qualified tax professional in preparing their return, which in the Tax Court's view also bolstered the reasonable cause and good faith defense. The Tax Court concluded that the McGuires did not know nor should they have known that they had additional income required to be shown on their return, and the penalty for the underpayment therefore did not apply.

For a discussion of the ATPC, see Parker Tax ¶102,630. The accuracy related penalty for underpayment of tax is discussed at Parker Tax ¶262,120.

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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