By Matt Pavich, J.D.
A couple whose financial situation changed was not entitled to the premium tax credit offered under the Affordable Care Act and failed to pay the resulting increase in tax, the United States Tax Court has ruled. The court noted, however, that the couple, through no fault of their own, did not know they were supposed to pay the tax and, thus, were not liable for the penalty payment (McGuire v. Commissioner of Internal Revenue, August 28, 2017, Buch, R.).
Background. In 2013, the couple applied for and received benefits under the ACA, having met the financial threshold. The health insurance exchange, Covered California, found that the couple was eligible for a total annual credit of $7,092 and the couple enrolled in a silver plan that had a $1,181.97 monthly premium. Shortly thereafter, the wife began working and her new income put the couple over the eligibility limit. Covered California sent a letter to the couple informing them that they were no longer eligible for a silver plan because their income was now too high, but the couple never received the letter. Covered California was deluged with work resulting from the first ACA enrollment period and failed to update the couple’s address and failed to send them a Form 1095-A for use in calculating their premium tax credit. The couple was also unaware of various instructions for how to report their annual premium tax credit and failed to report it. The IRS issued a notice of deficiency and determined an accuracy-related penalty. The couple petitioned the court for relief.
Liable for deficiency. The court noted that the couple received an advance premium tax credit based on the husband’s income. Once the wife found work, however, the household income exceeded the 400 percent of the federal poverty line income threshold, rendering the couple ineligible for the advance credit. The couple contended that they only committed to the silver plan because of the credit and asked the court to rule fairly and justly on their behalf. The court, however, ruled that it could not ignore the clear law in this case. Because the couple received an advance to which they were ultimately not en titled, they were liable for the $7,092 deficiency.
Accuracy-related penalty. In the notice of deficiency, the IRS Commissioner offered a "boilerplate" determination of the accuracy-related penalty. The court noted that if the couple could show that they had reasonable cause for the underpayment of the tax and that they acted in good faith, they would not be liable for the penalty. The court further noted that, in the past, it had held that nonreceipt of relevant information can be a factor in finding that a taxpayer failed to comply with the law in good faith, specifically, when the taxpayer neither knows, nor has reason to know, that they received taxable income. Additionally, a third party’s failure to act can contribute to a good-faith defense.
In this case, the court found that the couple never received the Form 1095-A. Although they received the advance premium tax credit, the payments went to the insurance company, not the couple. Thus, not only did they not receive the Form, they never received the payments that would have been reported on that form. The couple relied on Covered California to fulfill its reporting obligations, but that did not occur. Additionally, the couple used an accountant to prepare their tax return. Thus, the court found that the couple did not have notice that they were being charged with taxable income. The court therefore ruled that the couple acted reasonably and in good faith regarding the eventual underpayment of their tax and was not liable for the penalty payment.
The case is No. 17312-16.
Attorneys: Steven A. McGuire, pro se. Emma S. Warner, IRS Office of Chief Counsel, for Commissioner of Internal Revenue.
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