On January 26, 2015, the IRS released an advance copy of Notice 2015-9, 2015-6 I.R.B. 1, which provides certain penalty relief 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 (as allowed for coverage under a qualified health plan) against the premium tax credit allowed on the tax return.
Beginning in 2014, I.R.C. § 36B provides a premium tax credit to eligible individuals to purchase health insurance from a state or federal Affordable Insurance Exchange (“Exchange”). The Exchange estimates the credit amount taxpayers receive using information supplied by the taxpayer, including family size and household income. Taxpayers can choose to have the estimated premium tax credit paid in advance. In August 2014, an IRS official said approximately eighty (80%) percent of individuals eligible for the premium tax credit elected to receive advance payments.
When filing their income tax returns, taxpayers electing to receive advance payments must reconcile such advance payments with the actual amount of the premium tax credit they were eligible to claim. A difference between the advance payments and the credit allowed on the return may result in either a smaller refund or a larger balance due if the advance payments exceed the allowed credit, or a larger refund or smaller balance due if the allowed credit exceeds the advance payments.
Failure to Pay Penalties
Under I.R.C. § 6651(a)(2), a penalty is assessed for failure to pay your entire income tax liability by April 15th (“late payment penalty”). The penalty is imposed at 0.5% of the amount of tax for each month the liability remains unpaid, up to a total of twenty-five (25%) percent.
What is not as well known is that all taxpayers are required to remit their tax liability evenly throughout the tax year in four quarterly installments. If you fail to pay in the greater of: (a) one-hundred (100%) percent of the prior year tax liability, or (b) ninety (90%) percent of the current year liability, in four equal installments throughout the year, the IRS will assess a penalty pursuant to I.R.C. § 6654 for each quarter the appropriate one-fourth installment was not remitted (“penalty for underpayment of estimated tax”). Most taxpayers are not subject to this because any withholding on wage income is treated as being paid equally throughout the year regardless of when it is actually withheld.
Notice 2015-9 states that, in certain circumstances, the IRS will exercise its ability to waive these two underpayment penalties when the underpayment is attributable to the repayment of the premium tax credit.
Requirements for Penalty Relief
The IRS will waive the late payment penalty for 2014 if you: (i) are otherwise current with your filing and payment obligations; (ii) have a balance due for the 2014 taxable year due to excess advance payments of the premium tax credit; and (iii) report the amount of excess advance credit payments on your 2014 tax return timely filed, including extensions (Line 46 of Form 1040 or Line 29 of Form 1040A).
In addition, the IRS will waive the penalty for underpayment of estimated tax for 2014 for an underpayment attributable to excess advance credit payments if you: (i) are otherwise current with your filing and payment obligations; and (ii) report the amount of the excess advance credit payments on a 2014 tax return timely filed, including extensions.
You will be treated as current with your filing and payment obligations in both scenarios if as of the date you file your 2014 income tax returns, you: (i) have filed, or filed an extension for, all currently required federal tax returns, and (ii) paid or have entered into an installment agreement (which is not in default), an offer in compromise, or both to satisfy a federal tax liability.
How to Request Relief from the Failure to Pay Penalty
Generally, the IRS automatically assesses the late payment penalty against taxpayers and sends a notice demanding payment. When responding to such a notice, you should submit a letter to the address listed in Notice 2015-9 with the following 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 paid the underlying liability at 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.
How to Request Relief from the Underpayment of Estimated Tax Penalty
To request a waiver of the I.R.C. § 6654 penalty, you should check box A in Part II of Form 2210, complete page 1 of the Form, and include the Form with your income tax return along with the statement: “Received excess advance payment of the premium tax credit.” You do not need to attach documentation from the Exchange, explain the circumstances under which you received an excess advance payment, or complete any page other than page 1 of the Form 2210. You also do not need to figure the amount of the penalty for it to be waived.
The relief applies only for the 2014 tax year.
The abatement provided by Notice 2015-19 applies only to the penalties, and not to interest on the unpaid liability. Thus, if you fail to pay your tax liability attributable to repayment of the premium tax credit by April 15, 2015, you will be subject to interest under I.R.C. § 6601 until the liability is paid.
Notice 2015-19 makes clear that it does not apply to any amounts a taxpayer owes under I.R.C. § 5000A for failure to carry minimum essential health insurance coverage (the individual insurance mandate penalty), because this amount is not subject to late payment or underpayment of estimated tax penalties.
It is unclear whether to be eligible for penalty relief, the entire tax liability must be attributable to the repayment of the premium tax credit. For example, if the taxpayer has a $4,000 unpaid tax liability on April 15th, 2015, only $700 of which is attributable to a required repayment of the premium tax credit, the language of Notice 2015-9 seems to suggest that, because the entire underpayment is not attributable to the repayment of the credit, the taxpayer is ineligible for penalty relief on the $700 attributable to the repayment. Further guidance will hopefully clarify this issue.