Carol McAtee & Associates, CPAS
IRS Gears up for Impact of Health Care Reform on Tax Season
As cited by Michael Cohn in the September 12th Daily Edition of Accounting Today, the Internal Revenue Service commissioner John Koskinen told a congressional subcommittee about the IRS’s progress on the Affordable Care Act and the impact that tax subsidies will have next tax season.
In a hearing before the House Ways and Means Health Subcommittee on Wednesday, Koskinen talked about how the IRS would be processing the premium tax credit, which helps subsidize the cost of health insurance coverage for eligible taxpayers.
He noted that eligible individuals can choose to have their insurer receive advance payment of the tax credit, the amount of which is based on a determination made by a health insurance marketplace or exchange. The amount of the tax refund may be increased or decreased according to how much of the tax credit is correctly calculated.
“At the end of the coverage year, taxpayers who opted for advance payment of the credit will reconcile the payment on their 2014 tax returns filed in 2015,” Koskinen explained in his prepared testimony. “When filing tax returns, these taxpayers will calculate the actual credit they qualified for based on their actual 2014 income. If the actual premium tax credit is larger than the sum of advance payments made during the year, the individual will be entitled to an additional credit amount. If the actual credit is smaller than the sum of the advance payments, the individual’s refund will be reduced or the amount of tax owed will be increased, subject to a statutory sliding scale of income-based repayment caps.”
The IRS recently issued a draft version of the new Form 8962, Premium Tax Credit, which taxpayers or their tax preparers will use to make the calculations and will file with their income tax return (see IRS Releases Draft Forms for Obamacare). The IRS has also developed a draft version of the Form 1095-A, Health Insurance Marketplace Statement, and the instructions, Koskinen noted, to facilitate the reconciliation process for the premium tax credit (see IRS Releases Long-Awaited Draft Instructions for Obamacare Employer Mandate).
“Beginning with coverage purchased in 2014, each Marketplace will issue the 1095-A to individuals who purchased a policy through the Marketplace,” he said. “The IRS recently issued a draft version of the form and its accompanying instructions. The transactional information contained in the 1095-A issued by the Marketplace will include not only the fact and cost of coverage, but also information on any advance payments of the premium tax credit made during the coverage year to the taxpayer’s insurance company on his or her behalf. This information will also be supplied to the IRS.”
Koskinen pointed out that the IRS is currently in a testing phase with both the federal and state health insurance marketplaces to ensure that its systems will be ready to operate as planned when filing season opens in early 2015. The marketplaces are responsible for reporting the necessary information accurately and on time to the IRS to allow the agency to efficiently sort for the basic qualification and computational elements of the premium tax credit.
Detecting Noncompliance
Koskinen said the IRS would not share publicly all of the tools and techniques it would use to detect noncompliance, but he noted that the IRS will be able to determine whether there is a record of anyone on the tax return having enrolled in a health insurance marketplace, which is a basic requirement to claim the credit, as well as whether any advance payments that have been made directly to an insurance company have been properly netted against the credit calculation. The IRS would also be able to see if a tax return reports inaccurately high premium costs or inaccurately low advance payments, compared to the marketplace data.
The IRS’s preparations for the upcoming tax-filing season in regard to the Affordable Care Act also involve the individual shared responsibility provision, Koskinen noted. Under this provision, also known as the individual mandate, individuals are required to have qualifying health insurance coverage for each month of the year, have an exemption, or make an individual shared responsibility payment.
“I would note that the vast majority of taxpayers will have health coverage from one source or another—such as the individual’s workplace, the Marketplace, Medicare or Medicaid—and so will have to do nothing more than check a box on their tax return,” said Koskinen.
A number of individuals will be exempt from the individual shared responsibility provision, he acknowledged. For example, an exemption will apply for individuals who have no affordable coverage options because the minimum amount they must pay for the annual premiums is more than 8 percent of their household income; or if they have a gap in coverage for less than three consecutive months; or if they qualify for an exemption for one of several other reasons, including, but not limited to, having a hardship that prevents them from obtaining coverage. Most individuals who qualify for an exemption and otherwise need to file a tax return will provide the exemption information with their returns, Koskinen noted.
The IRS recently issued a draft version of the new Form 8965, Health Coverage Exemptions, which taxpayers will use to claim an exemption from the coverage requirement and will file with their tax return, he pointed out.
“The small minority of individuals who do not have coverage and do not qualify for an exemption will need to make an individual shared responsibility payment,” said Koskinen. “A worksheet will be provided for the calculation of the shared responsibility payment, but the worksheet will not be required to be attached to the tax return. In general, the payment amount is either a percentage of the individual’s income or a flat dollar amount, whichever is greater. The amount owed is one-twelfth of the annual payment for each month that a person or the person’s dependents are not covered and are not exempt.”
For 2014, he added, the payment amount is the greater of either 1 percent of the person’s household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment is capped at the cost of the national average premium for the “bronze level” health plan available through the health insurance marketplace in 2014.
Getting the Word Out
Along with building and improving the IRS’s processes and systems to handle the requirements of the Affordable Care Act, and developing and issuing new forms and accompanying instructions in advance of the filing season, the IRS is also trying to make sure taxpayers know how the major ACA provisions may affect them at tax time. Koskinen pointed out that the IRS.gov site has a section devoted to the Affordable Care Act, which contains answers to many questions about the tax provisions, along with links that will take taxpayers to online ACA resources of other federal agencies. There already have been more than 2.5 million visits to this section, he noted.
The IRS has also issued 16 plain-language Health Care Tax Tips so far this year, and more are planned. They are being sent to more than 500,000 email subscribers in the tax and legal community as well as partner groups. The IRS has also produced YouTube videos on the ACA in English, Spanish and American Sign Language.
IRS officials have also provided outreach to tax software developers and to tax preparers at this year’s five IRS Nationwide Tax Forums, which attracted more than 10,000 tax professionals. The agency has also increased its use of social media to help people learn about the major ACA tax-related provisions, including posts on the IRS’s Tumblr blog and tweets on IRS Twitter pages.
Change in Circumstances
The IRS has also been making an effort to let taxpayers and their tax preparers know that they need to make sure that if there is a change in the taxpayer’s financial circumstances and they have been receiving the premium tax credit through a health insurance marketplace, they need to adjust their information accordingly.
“Throughout 2014, we have been making substantial efforts to ensure that individual s who opted for advance payment of the premium tax credit understand that a change in their circumstances during the year can make a big difference between the Marketplace’s initial determination of how much credit a person qualifies for and the final premium tax credit amount,” he said. “Changes in circumstances during the year that should prompt individuals to update their information with the Marketplace include, but are not limited to: an increase or decrease in the individual’s income; marriage or divorce; the birth or adoption of a child; starting a job with health insurance; gaining or losing eligibility for other health care coverage; and a change in residence. Individuals receiving advance payments of the premium tax credit are required to notify the Marketplace of any change s in circumstances during the year as soon as possible, so their information can be updated and the amount of the advance payment adjusted if necessary. The IRS urges individuals to comply with this requirement, so the total advance payments made for the year will be the same as or closely match the final premium tax credit amount on the individual’s tax return. The IRS’s goal in its ACA-related communication efforts is to help people understand the law, which in turn will make their return filing experience easier next year.”
H&R Block president and CEO Bill Cobb nevertheless recently expressed uneasiness about how much complexity the Affordable Care Act will add to his customers’ tax returns next tax season (see H&R Block CEO Foresees Problems with Obamacare Tax Forms).
Budget Cutbacks and Phone Call Volume
Koskinen told lawmakers that the IRS has been doing the extra work on preparing for the Affordable Care Act despite budget cutbacks by Congress. He anticipates an increase in calls to the IRS’s toll-free help lines during the 2015 filing season from taxpayers seeking assistance in regard to the ACA, and that call volume may be increased by Congress’s delay so far in passing tax extender legislation.
“Our ability to meet this demand may be strained due to ongoing budget constraints and the possibility of an additional increase in call volume related to the impact of tax extender legislation that may be passed later this year,” he said. “During the 2014 filing season, phone service outperformed our projections, notwithstanding our significant funding limitations. In addition to the diligent efforts of our employees, we attributed this improvement to our increased ability to provide information on IRS.gov, as well as to the lack of major tax legislation in 2013. Now that filing season is over, we no longer have extra seasonal employees and thus have fewer people answering the phones. For this reason, we expect that our overall FY 2014 level of phone service will drop below our performance during the 2014 filing season. The work being done to implement the major tax-related provisions of the ACA has occurred in the absence of appropriated dollars that had been requested for this effort. Nonetheless, the IRS continues to deliver on its congressionally mandated duties under the ACA by refocusing the needed funding from other priorities.”
Nevertheless, he warned that customer service levels could decline next tax season unless the IRS receives a bigger budget, as requested by the Obama administration.
“Addressing phone service waits, as well as the various operational and staffing shortages across the IRS, begins with the administration’s fiscal year 2015 budget request,” he said. “Within this request there is new IRS funding, including the amount provided in the Opportunity, Growth, and Security Initiative, that would go towards taxpayer service programs. We estimate this would allow us to hire enough additional employees to answer 12 million more taxpayer calls. This increase in calls answered would amount to a level of phone service of more than 80 percent, which would be a significant improvement over the FY 2013 level. The additional calls answered would include calls from those seeking help with the tax-related provisions of the ACA as well as the expected tax extender legislation. If we do not receive the requested funding and cannot hire the additional personnel necessary to handle our call volume, we estimate our level of phone service next year would decline significantly. We will be watching developments in the budget process closely, in the hopes that Congress will ultimately provide adequate resources for the IRS for the next fiscal year.”
Rep. Kevin Brady, R-Texas, who chairs the Ways and Means Health Subcommittee, anticipates problems next year for taxpayers after the troubled rollout of Healthcare.gov last October by the Department of Health and Human Services. He contended that the ACA’s income verification system is still not working. “Despite [former HHS] Secretary [Kathleen] Sebelius’ certifying to Congress on Jan. 1, 2014 that a working verification system was in place, the HHS Inspector General found that there were nearly 1 million income inconsistencies on Exchange applications,” said Brady. “Because individuals were able to self-attest to their income levels, there was little data before taxpayer subsidies were sent out the door. If the data is wrong, thanks to the horribly poor implementation of the Affordable Care Act, hundreds of thousands of Americans could be hit with a nasty surprise when they do their taxes next year, and could be forced to pay back hundreds or even thousands of dollars.”
“Recently a Treasury Department spokesperson suggested that the ineligible subsidy that someone owes back to taxpayers could be ‘capped,’ but that’s not how the law is written,” Brady added. “Individuals who are not eligible, either because of improper income data or coverage from another source, must repay the entire amount. The ACA tried to invent a system that would collect that information to prevent improper subsidies. But guess what? It has proven so far to be too complicated and too burdensome.”
Andy Slavitt, principal deputy administrator at HHS’s Centers for Medicare and Medicaid Services, also testified at Wednesday’s hearing, telling lawmakers that they are preparing for the upcoming open enrollment period for the health insurance marketplaces. “As we plan for the second open enrollment, including the first opportunity for many consumers to re-enroll in coverage, we are focused on building on the advances made for consumers during the first year,” he said. “Our focus is on providing consumers more choices for coverage and affordable options, assisting them with selecting the right plans for them, and educating first-time and newly insured consumers about their benefits, their eligibility requirements, and their financial protections. At the same time we are keenly aware of the challenges we face as a new program of this scale matures, particularly one that faced significant challenges in its first year. It is thanks to the work of a very committed team heeding the lessons of the last year that we will continue to build on the success of the first year of state-based and federally facilitated marketplaces.”
If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
