A Lesson from 2015: Help Clients Avoid Unpleasant ACA Surprises
We made it through last year’s tax season thinking Affordable Care Act (ACA) matters were over with until the 2016 filing season, but we were wrong. Individuals who did not indicate on their Form 1040s that they had received the Advanced Premium Tax Credit were surprised to get an IRS notice at the end of 2015 requiring repayment of the credit.
The IRS identified many cases where taxpayers took the credit, but then did not indicate that they did so on their Form 1040. Tax preparers, unaware of the advance credit, calculated it again on the 1040, so taxpayers were effectively paid twice. The IRS caught these double dips, assessed the difference, and included the 20% accuracy penalty (Section 6662) in addition to repayment of the advanced premium tax credit and interest.
Clients who do not understand the complexities of the ACA assert they did nothing wrong, gave us all the necessary information to prepare their return, and feel we should be responsible for the 6662 penalty and interest. Confusion about reporting responsibilities persists and the problem is big: approximately 6.6 million returns reported individual shared responsibility payments (ISRP).
Last February, I wrote a blog on Rules and Resources for ACA Due Diligence. We started the 2015 filing season with everything on first-year filings for ISRP being new and unknown. We knew we would need to put forth effort in complying with rules under Circular 230, the AICPA Code of Professional Conduct and the AICPA’s Statements on Standards for Tax Services, educating clients on the additional forms needed and becoming familiar with the changes to other forms. CPAs met the challenge as did the AICPA, which provided resources to assist members, including the AICPA Health Care Reform Resources Center and client communication materials on the Tax Practitioner’s Toolkit.
Throughout the filing season, our collective understanding grew. For example, we learned that:
- All of our clients did not have 12 months of health care insurance coverage and some owed the individual shared responsibility payment;
- We did not see many 1095 series forms;
- We did see some taxpayers who qualified for one of the exemptions; and
- Most taxpayers had little knowledge of what information to furnish us to prepare their returns.
For 2015 returns, the ISRP penalty will be higher. The penalty is the greater of a flat dollar amount or a percentage of household income as follows:
- $325 per adult and $162.50 per child under age 18, up to a maximum of $975 per family or
- 2% of household income above the filing threshold for a person’s filing status.
- However, the penalty cannot be more than the average premium for a bronze level purchase from the Marketplace, which can vary by region but is about $2,570 for 2015.
We now face the 2016 filing season with all the same challenges as last year -- getting accurate ACA information from taxpayers to file their 2015 returns. Many taxpayers are still not clear about the information necessary to file their returns, such as the Form 1095 series showing the months of coverage and persons covered in the taxpayer’s household, as well as information on any exemption from coverage or on any Advanced Premium Tax Credit received.
CPAs can make sure that their tax organizers and taxpayer interviews include questions like:
- Did you and your dependents have healthcare coverage for the full year?
- Did you receive any of the following IRS documents: Form 1095-A (Health Insurance Marketplace Statement), 1095-B (Health Coverage) or Form 1095-C (Employer Provided Health Insurance Offer and Coverage)? If so, please include them with your tax return information.
- If you or your dependents did not have healthcare coverage for each month during the year, do you fall into one of the following exemption categories: Indian tribe membership, health sharing ministry membership, religious sect membership, incarceration, exempt non-citizen or economic hardship? If you received an exemption certificate, please include it with your tax return information.
- If you obtained coverage in the Marketplace, did you apply any Advanced Premium Tax Credit to your insurance premium?
To complicate matters, some early filers may answer “no” to the question about whether they received a 1095 form, then receive it after the tax return is prepared. The IRS extended the date for sending individuals’ 2015 1095-B and 1095-C forms to March 31. However, the IRS notes in its FAQs that: While the information on these forms may assist in preparing a return, they are not required. Individual taxpayers will generally not be affected by this extension and should file their returns as they normally would.
As we start the 2016 filing season, we need to be prepared for more complexities on ACA reporting on individual returns. We will need to exercise more due diligence to obtain the necessary information, so that the taxpayers will not be assessed ACA penalties (and therefore be tempted to pass the blame on to us). IRM Section 22.214.171.124 (Notice Descriptions) provides information on various notices that have ACA implications.
Form 14950 will also be sent for premium credit verification. This form, sent by the IRS, is essentially a checklist of information that helps the IRS substantiate the level of taxpayer and dependent health insurance coverage.
Taken together, CPAs have the opportunity to prevent (or at least reduce) ACA premium credit problems this year, and perhaps make this a smoother, post-tax season 2016.
Gerard Schreiber Jr., CPA, Partner, Schreiber & Schreiber CPAs in Metairie, LA. Gerard specializes in tax, accounting and consulting matters for individuals and small businesses. He serves on the AICPA IRS Advocacy and Relations Committee and has authored numerous courses and articles on various tax subjects.
Valrie Chambers, CPA, PhD, is an Associate Professor of Accounting at Stetson University in Celebration, FL. She has over a decade of public accounting experience as owner/partner-in-charge of a CPA firm in Houston that specialized in advising small business owners. Dr. Chambers has been published in numerous journals and received the Texas Society of CPAs Outstanding Accounting Educator Award for mid-sized Texas universities in 2012. She has volunteered for the AICPA and the IRS’ Volunteer Income Tax Assistance in Corpus Christi.
ACA surprise courtesy of Shutterstock.