ACA and Tax Procedure: Many Unanswered Questions Still Exist

The individual shared responsibility payment is colloquially known as the “ACA penalty.” The Service is restricted from treating the penalty like any other tax debt. Although the penalty is to be “assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68.” (Section 5000A(g)(1)) the Service may not employ criminal penalties, criminal prosecutions, the Notice of Federal Tax Lien, or levy procedures to collect the penalty. Section 5000A(g)(2). The ban on levy procedures encompasses many programs employed in the general course of tax collection, including the State Income Tax Levy Program and the Federal Payment Levy Program.

While a Notice of Federal Tax Lien (NFTL) may not be filed based on a Section 5000A assessment, the “secret” statutory lien that applies to all tax debts will still arise and attach to all property of the taxpayer under Section 6321. The secret lien could potentially be foreclosed in federal district court pursuant to Section 7403, but the Service will not have the benefit of any priority status that would have been conferred by a NFTL.

Collection of the ACA penalty is expected to occur largely through voluntary payments and refund offsets. Refund offsets are possible, despite the ACA’s prohibition on levies, because the application of an overpayment to a tax liability pursuant to Section 6402(a) is technically not a levy. Perry v. Comm’r, T.C. Memo. 2010-219, and cases cited. See also discussion in the National Taxpayer Advocate’s 2011 Annual Report to Congress, p. 598 (noting that legislation could be helpful to curb inappropriate uses of the Service’s offset authority).

It remains to be seen how the Service will implement the restrictions on its collection powers. For example, the penalty may need to be tracked on its own account transcript. If the penalty is not included on the 1040 account transcript, taxpayers’ representatives will presumably need to identify the penalty as a separate matter on the Power of Attorney (Form 2848).

As an excise tax, the ACA penalty will be subject to the 3 year assessment statute of limitations of Section 6501(a). It is an excise tax because Section 5000A can be understood as imposing an indirect tax on the condition of not having health insurance. Nat’l Fed. Indep. Bus. v. Sebelius, 132 S.Ct. 2566, 2599-2600 (2012). Section 5000A is located in chapter 48, subtitle D of the Internal Revenue Code. Subtitle D is titled Miscellaneous Excise Taxes. If the penalty is underreported by more than 25 percent of the reported penalty, the limitations period is 6 years under Section 6501(e)(3). There is no limitations period at all in the case of fraud or a willful attempt to defeat or evade the penalty, or a failure to file a return. Section 6501(c)(1)(2)&(3).

We do not yet know what the Service’s assessment procedures will be for the ACA penalty. Nothing in the Affordable Care Act or subsequent amendments limits the IRS’s assessment authority with respect to the penalty. Third party information returns filed under Sections 6055 and 6056 will aid the Service in its assessment efforts. Taxpayers have no right to Tax Court deficiency procedures prior to assessment of the ACA penalty. See Section 6211(a), definition of a deficiency. The Service could voluntarily create a pre-assessment administrative review process. This seems advisable as a matter of fairness and political expediency. Many taxpayers will not be able to afford paying the penalty and then filing a refund suit.

In many ways it would make sense, and promote administrative simplicity, for the ACA penalty to be subject to the same assessment procedures as an individual income tax liability. The ACA penalty is to be included on the individual income tax return. Section 5000A(b)(2). More importantly, calculation of the penalty is based on the income, health insurance status, and exemption status of the taxpayer(s) and their dependents.

Automated adjustments, examinations, and Tax Court deficiency litigation frequently involve items of income or whether a person qualifies as the taxpayer’s dependent. Health insurance status could be at issue in a proposed disallowance of the Health Insurance Premium Tax Credit (which is subject to deficiency procedures). The ACA penalty may be implicated by the outcome of these processes. It might be simpler and less confusing for taxpayers if proposed adjustments to the ACA penalty were included with notice of other proposed adjustments to a tax return. However, once a petition is filed in Tax Court, any ACA penalty issues will have to be separated because they are beyond the court’s jurisdiction.

We also do not yet know what procedures the Service will use to collect the ACA penalty. As with the assessment issues just discussed, in some areas the Service has very few restrictions placed on it. For example, because liens and levies may not be used to collect the penalty, the collection due process rights associated with liens and levies do not apply. The Service is not legally obligated to provide the rights conferred by sections 6330 and 6331 when employing its offset authority. Boyd v. Comm’r, 451 F.3d 8 (1st Cir. 2006). As a matter of fair and efficient tax administration, though, it may choose to provide for post-assessment administrative review.

The general collection statute expiration date (CSED) under Section 6502 should apply to collection of the ACA penalty. It has been suggested that there is no CSED with respect to refund offsets under Section 6402(a), because Section 6502(a) only explicitly limits levies and proceedings in court. ((See Ajay Gupta, ACA Penalty: Toothless? Hardly! Corporate Raiders Fare Better, 141 Tax Notes 877 (Nov. 25, 2013)). This is contrary to the Service’s current practice, and would be a fundamental change in collection policy. See IRM 21.4.6.4, Refund Offset Research (10/1/2013), Note following #3 (requiring consideration of the CSED “in all cases.”). Section 6402(a) explicitly refers to “the applicable period of limitations”. Section 6401(a) of the Code also provides that the term ‘overpayment’ includes a payment of any internal revenue tax that is “collected after the expiration of the period of limitation properly applicable thereto.” In Program Management Technical Advice 2011-035, the Service has noted: “Although the phrase any liability in respect of an internal revenue tax is not defined in the statute, it has long been the Service’s position that a tax liability which could be enforced through normal assessment and collection procedures … is a prerequisite for making an offset under section 6402. See Treas. Reg. section 301.6402-1.”

If the ACA penalty is not timely paid, late payment penalties may be imposed under Section 6651(a)(3). Interest may be imposed under Section 6601, although interest will not begin to run until assessment. Section 6601(e)(2)(A). This is a result of Congress having specified that the ACA penalty is to be collected in the same manner as an assessable penalty located in subchapter B of chapter 68 of the Code.

The Service has stated that the 6662 accuracy-related penalty does not apply to the shared responsibility payment. 78 FR at 53655 (Aug. 30, 2013). The Service reasoned, “The section 5000A shared responsibility payment is not taken into consideration in determining whether there is an underpayment of tax under section 6664. Therefore, the shared responsibility payment is not taken into account under section 6662.” It is not clear how this conclusion was reached: the section 6662 penalty applies to underpayments of tax as defined in section 6664, and section 6664 refers to “any tax imposed by this title.” For Constitutional purposes, the ACA penalty is a tax, imposed by Title 26 of the U.S. Code. However, even if the Service changes its interpretation of section 6664, any accuracy-related penalty would at least have to be based on negligence or disregard of the rules. Section 6662(b)(1). The “substantial understatement” penalty under section 6662(b)(2) only applies to income tax.

The Service has not yet released forms, instructions, detailed publications, IRM provisions, or much guidance regarding assessment and collection of the ACA penalty. There are significant uncertainties at this point regarding the practical implementation of section 5000A.

Assessment and collection of Premium Tax Credit overpayments

In contrast to the individual shared responsibility payment, the Health Insurance Premium Tax Credit (PTC) fits readily into the Service’s existing assessment and collection procedures. The PTC is a new refundable credit, and it is treated for assessment and collection purposes like the existing refundable credits. PTC is available in advance or may be claimed on a tax return.

Anyone who receives advance PTC payments (APTC) must file a tax return to reconcile the advance payments with the PTC actually due to the taxpayer. Treas. Reg. § 1.36B-4. Excess advance payments are treated as additional income tax liability. Section 36B(f)(2); Treas. Reg. § 1.36B-4(a)(1)(i). PTC not taken in advance could also be refunded and then subsequently disallowed.

The Service’s determinations related to PTC eligibility are subject to the same deficiency procedures available to other refundable tax credits under Section 6211(b)(4). Thankfully, there is nothing analogous to the Earned Income Credit ban for PTC.

The ACA does not impose any limits on the Service’s collection powers for excess PTC; therefore, collection may take the form of liens, levies and refund offsets. Penalties and interest may be assessed as with any other unpaid income tax liability.

The uncertainty around accuracy-related penalties under section 6662 is relevant to recipients of the Premium Tax Credit, and particularly to taxpayers who take APTC. The accuracy-related penalty is complex, and I will not describe it in detail here (it has been the subject of several previous Procedurally Taxing posts, including just this past week). In brief, the penalty may be imposed when there is an underpayment of tax as defined in section 6664. In Program Manager Technical Advice Memorandum 2012-016, the Service has conceded that the accuracy penalty does not apply if a disallowed refundable credit was frozen and not actually received by the taxpayer. Previously, the Service asserted that the accuracy penalty did apply if the disallowed credit was received by the taxpayer. However, in Rand v. Commissioner the Tax Court held that disallowed refundable credits cannot reduce the amount shown as tax on the return below zero. 141 T.C. No. 12 (2013). The Commissioner initially appealed the decision to the Seventh Circuit. On June 10, 2014, the parties filed a stipulation to dismiss the appeal with prejudice. It remains to be seen whether the Service will attempt to overrule Rand through regulations or other means.