On its website and in a statement, IRS has announced that it will not reject returns for tax year 2016 that are silent on whether the taxpayer has complied with the individual mandate provisions of the Affordable Care Act (ACA). These provisions require the taxpayer to have qualifying health care coverage, qualify for an exemption, or pay a penalty. IRS had previously said such “silent returns” would be rejected. IRS shifted its policy to comply with a recent Presidential executive order directing agencies to minimize the ACA’s impact.
Background on individual mandate penalty. Under it’s so-called individual mandate provision, the ACA requires individuals to obtain qualifying health insurance coverage, receive an exemption from the coverage requirement (e.g., on account of having household income below the return filing threshold), or pay a penalty. (Code Sec. 5000A)
The Instructions to Form 1040 for 2016 direct taxpayers who had qualifying health care coverage (aka “minimum essential coverage”) for every month of 2016 for themselves, spouses (if filing jointly), and dependents to check the box on line 61 (Health care: individual responsibility) and leave the entry space blank. A taxpayer that can’t check the box on line 61 must generally either claim a coverage exemption on Form 8965 (Health Coverage Exemptions) or report an individual mandate penalty (aka “shared responsibility payment”) on line 61 for each month that the taxpayer, spouse (if filing jointly), or someone the taxpayer can or does claim as a dependent didn’t have coverage. The amount of a taxpayer’s individual mandate penalty is based, in part, on the number of individuals he is responsible for who do not have minimum essential coverage. (Code Sec. 5000A(c)(3); Reg. § 1.5000A-4)
Background on ACA executive order. President Trump’s first executive order, signed hours after taking office, stated his intent to seek prompt repeal of the ACA (referred to in the executive order as “the Act”) and, pending repeal, directed agency and department heads to exercise all authority and discretion available to them to minimize the ACA’s impact. The order stated that:
- To the maximum extent permitted by law, the Secretary of Health and Human Services (HHS) and the heads of all other executive departments and agencies (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.
Although the President did not specify which parts of the program would be affected by his order, Kellyanne Conway, counselor to the president, said on ABC’s “This Week” program that President Trump “may stop enforcing the individual mandate.” Although the Trump Administration and HHS can’t simply repeal the individual mandate—which is part of a law passed by Congress and signed by President Obama—they could make the regulatory exemptions from it so broad that the mandate (which is a critical component of the ACA) is weakened, if not completely ineffective.
New policy on “silent returns.” In an updated page on its website titled “Individual Shared Responsibility Provision” and in a statement, IRS says that in past years, tax returns that were silent about individual mandate compliance (“silent returns”) were still processed. In other words, they weren’t returned to the taxpayer as being incomplete. Earlier this year, IRS put in place system changes that would reject tax returns during processing where the taxpayer didn’t provide necessary individual mandate information on line 61 of Form 1040.
In light of the recent executive order directing federal agencies to exercise authority and discretion available to them to reduce potential burden, IRS now says it has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status on line 61. However, IRS notes that legislative provisions of the ACA are still in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe.
IRS notes that processing silent returns means that taxpayer returns are not systemically rejected, allowing them to be processed and minimizing burden on taxpayers, including those expecting a refund. However, it says that when IRS “has questions about a tax return, taxpayers may receive follow-up questions and correspondence at a future date, after the filing process is completed.”
RIA observation: In other words, IRS could query the filer of a silent return for the taxpayer’s compliance with the individual mandate provisions, and, if he didn’t have qualifying health care coverage for all of 2016, or didn’t qualify for an exemption, try to collect the individual mandate penalty. However, IRS’s tools for doing so are limited.
Under Code Sec. 5000A(g)(2) and Reg. § 1.5000A-5(b), a taxpayer is not subject to any criminal prosecution or penalty for failure to timely pay the individual mandate penalty, and IRS can’t file a notice of lien with respect to any property of a taxpayer because of his failure to pay the individual mandate penalty or levy on any property of a taxpayer with respect to that failure. But IRS may offset any liability for the shared responsibility payment against any overpayment due the taxpayer, in accordance with Code Sec. 6402(a) and its regs.
RIA observation: Thus, if a taxpayer on whom the penalty is imposed is owed a tax refund, IRS may reduce the amount of the refund it pays to the taxpayer by the amount of the penalty. Since IRS can’t use certain collection methods that are otherwise authorized for the collection of taxes (i.e., the filing of notices of liens and levies) to collect the penalty, offsetting refunds and credits may be the only practical way for IRS to collect the penalty.
References: For the requirement that non-exempt individuals maintain minimum essential health coverage, see FTC 2d/FIN ¶ A-6401; United States Tax Reporter ¶ 50,00A4.
IRS webpage titled “Individual Shared Responsibility Provision.”
IRS statement on returns silent on compliance with ACA individual mandate.