Health Reform WK-EDGE ACA’s Shared Responsibility Payment is a penalty, not a tax
Friday, February 16, 2018

ACA’s Shared Responsibility Payment is a penalty, not a tax

By Jeffrey H. Brochin, J.D.

A district court erred in determining that it lacked subject matter jurisdiction to hear the appeal of taxpayers who sought a refund of their Shared Responsibility Payment (SRP) that had been deducted under provisions of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), a federal appellate court has ruled. The SRP was a penalty and not a tax, and therefore by filing IRS Form 843, the taxpayers’ administrative claim was duly filed (Cash v. U.S.February 9, 2018, per curiam).

Background: The ACA requires individuals who do not maintain qualifying health insurance, and do not qualify for a coverage exemption, to make an SRP—which the ACA (2 U.S.C. § 5000A(b)(1), (b)(2), (c)) describes as a "penalty"—when filing their federal income tax return. In April 2015, the taxpayers filed a year 2014 Form 1040 tax return, on which they reported a $575 SRP because they had not maintained minimum essential health coverage for the year 2014. They received a tax refund on May 15, 2015 for $2,525 which had been offset by $575, to satisfy their SRP liability. On May 18, 2015, they filed a Form 843, "Claim for Refund and Request for Abatement," with the Internal Revenue Service (IRS), requesting a refund of $575 for the SRP, and raising various constitutional objections to the assessment. Over the next few months, the IRS sent two letters stating that additional time was needed to determine what action would be taken on their account.

In September 2015, the IRS notified them that they would need to file an amended return on Form 1040X in order to change any information on their original tax return. Instead of filing a Form 1040X, they filed suit in district court in December 2015, more than six months after their initial refund request. The government moved to dismiss the complaint for lack of subject matter jurisdiction and for failure to state a claim for relief. The taxpayers opposed that motion, and moved for summary judgment. The Magistrate Judge concluded that they had failed to exhaust their administrative remedies, which is a prerequisite to a waiver of sovereign immunity in certain taxpayer suits, because they had filed their refund claim using an improper form. The taxpayers then appealed.

Waiver of Sovereign Immunity. The United States has waived its sovereign immunity against suits for refunds of taxes or penalties deemed erroneously or illegally assessed or collected by the IRS. However, the waiver is conditional: the taxpayer must pay the disputed tax or penalty, and duly file an administrative claim with the IRS prior to filing suit. The Code further provides that the taxpayer must wait six months to initiate a suit for refund unless the IRS decides the administrative claim earlier. The parties agree that the taxpayers’ suit falls within the scope of the Code but dispute whether the administrative claim was "duly filed." The relevant Treasury regulation requires that individuals must use the correct form to properly file a refund claim.

A penalty and not a tax. The taxpayers argued that the district court erred in concluding that the "special rules" for filing for a tax refund applied to their claim, and they maintained that the SRP was not a tax, but rather a penalty, for which Form 843 was the proper form for seeking a refund. The court noted that the ACA directs that the SRP be assessed and collected in the same manner as taxes, but even if the SRP may reasonably be characterized as a tax for constitutional purposes, for statutory purposes, it is treated as a penalty. Furthermore, individuals should be able to rely on the clear and unequivocal text of the Code, and the corresponding regulations, when dealing with the tax refund process, and not have to intuit that the word "penalty" is merely a label for what may be functionally a tax.

Taxpayers filed correct form. The district court had concluded that the taxpayers were seeking "a refund of income taxes withheld from their payroll and paid over to the IRS," and that Form 843 was therefore simply not the appropriate form on which to initiate a formal income tax refund claim. However, the appellate court disagreed: although the mechanism used to collect the $575 was the taxpayers’ tax return, and the amount was offset against their income tax refund, the payment was remitted to the government as a penalty under 26 U.S.C. § 5000A(b). The action that the taxpayers challenged in their refund claim was the assessment of that "penalty" and not the withholding of income taxes.

Under the clear language of the regulations, Form 843 was the proper form to be used for claiming a refund of penalties not otherwise provided for, whether "rightly or wrongly" assessed. Contrary to the government’s argument, the appellate court found that consideration of Form 1040X and its instructions supports the conclusion that it was not the proper form for the taxpayers to use to exhaust their administrative remedies.

Based on the foregoing, the appellate court ruled that the district court erred in concluding that it lacked subject matter jurisdiction on the basis that the taxpayers used the wrong form to exhaust their administrative remedies, and vacated the district court’s judgment and remanded the matter for further proceedings consistent with the opinion.

The case is No. 17-1441.

Attorneys: Gladys Cash, pro se. Kyle L. Bishop, U.S. Department of Justice, for the United States.

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