Originally published on Forbes.com
Judge Ronald Lee Buch of the Tax Court seemed to think that Steven and Robin McGuire were getting a raw deal from the IRS on an excess tax credit under the Affordable Care Act. Unfortunately, Judge Buch could not do much about it. Reilly’s First Law of Tax Planning -It is what it is. Deal with it. Here is the story.
The Plan
In 2013, the McGuires had consulted with their state ACA exchange, Covered California which determined that based on the $800 per week that Mr. McGuire was drawing from his parts and service business they were entitled to an advance premium assistance credit of $591 per month. Based on that they went for the Blue Shield Silver 70 PPO plan. The monthly premium was $1,181.97. The McGuires paid half of that and the balance was covered by the advance premium credit.
A Change And A Tale Of Woe
Later in 2013, Mrs. McGuire started working at a job that paid her $600 per week. She promptly notified Covered California. The income change was very significant because it meant the McGuires had income of more than 400% of the Federal poverty line. That meant they would not qualify for any credit at all.
Several months later, well into the 2014 tax year in the controversy, Covered California sent a letter to the McGuires letting them know that they no longer qualified for the Enhanced Silver Plan because their income was too high warning them that “If you take the full premium assistance to pay the premium, and your income is higher, you may have to pay some back at tax time.”
Unfortunately, the McGuires never received the letter. The decision indicates that according to the records in evidence “..during Covered California’s first open enrollment period,Covered California was so busy that it was not uncommon that changes were not implemented “.
The Forms
The McGuires had been trying to let Covered California know that their address had changed, but CC never updated their address. That would also account for why the McGuires never received the Form 1095-A which Covered California sent out to them informing them of their advanced premium credit. The IRS got its copy of the Form 1095-A.
Judge Buch then launches into a fairly detailed account of the preparation of the McGuire tax return for 2014 discussing various boxes that were checked and Form 8962 (and its instructions) and Form 8965 (and its instructions).
The executive summary of that nightmare is that the McGuires indicated that they were not responsible for a shared responsibility payment because they had paid for health insurance. They didn’t report anything about the premium credit, because they did not get Form 1095-A.
The IRS, of course, did know about the credit and now having their income determined that they did not qualify for the $7,092 credit and increased their tax liability by that amount. As is routine the IRS threw in an accuracy penalty.
The Argument
Jimmy Hoover covered the decision for Law 360 with the headline – Couple Must Pay Back ACA Credits After Wife Gets Job. I kind of object to the “Pay Back”. It implies that the McGuires received something. From their viewpoint, though, what they did was buy health insurance at a price they thought they could afford. Now they are being told they should have paid twice as much and are being hit with a penalty. And the payment is a tax rather than deductible health insurance.
Judge Buch quoted Mrs. McGuire:
…. it was Covered California’s responsibility to ensure clients only received the Advance Premium Tax Credit for which they qualified. We would never have committed to paying for medical coverage in excess of $14,000 per year. We cannot afford it and would have continued to shop in the private sector to purchase the minimal, least expensive coverage or gone without coverage completely and suffered the penalties.
If we are deemed responsible for paying back this deficiency, it would be devastating and completely unjust. We hope and pray you are convinced that we have made every single effort to get Covered California to make proper adjustments to our reported income and subsequently to the Advance Premium Tax Credit we were qualified to receive without success. The whole purpose of the Affordable Care Act was to provide citizens with just that, affordable healthcare. This has been an absolute nightmare and we hope you will rule fairly and justly today. In other words, the McGuires considered themselves to have been trapped in a health plan that they could not afford without the subsidy provided by the ACA. And they ask us to rule “fairly and justly” or, otherwise stated, equitably.
The Decision
The decision went mostly against the McGuires
But we are not a court of equity, and we cannot ignore the law to achieve an equitable end. Although we are sympathetic to the McGuires’ situation, the statute is clear; excess advance premium tax credits are treated as an increase in the tax imposed. The McGuires received an advance of a credit to which they ultimately were not entitled. They are liable for the $7,092 deficiency. (Citations omitted)
Judge Buch did get a break on the accuracy penalty, which I think the IRS assesses much too routinely.
The McGuires did not receive a Form 1095-A. Although they received a benefit in the form of an advance premium tax credit to pay health insurance premiums, it was the insurance company and not the McGuires that received the payments. Not only did the McGuires not receive the Form 1095-A, but they also were not the actual recipients of the payments that would have been reported on that form. The McGuires did not have notice that they were being charged with taxable income.
Also, they had used a CPA to prepare the return.
The System
Some cursory research indicates that problems with Covered California are pretty common. Emily Bazar led a story in the Sacramento Bee in January with
Frustrating. Irresponsible. Stressful. Crazy. Devastating. Asinine. The worst.
Those are some of the words three Californians used to describe their recent experiences enrolling in – and paying for – health coverage from Covered California.
The nature of my practice has spared me from dealing with the complexities of the program, which seem rather mind-boggling now that I am looking at the forms. It definitely seems like a confusing way to do things that is hard on people with unpredictable incomes. I guess that is one of the reasons why President Trump promised to repeal and replace it.
I found it interesting when I checked the docket on the McGuire case that, they had changed it from a small claims case. That means they might appeal. We’ll see.
Other Coverage
I was surprised that there was not more coverage on this case. Besides Law 360, noted above, there was something by Lew Taishoff, who seems to be sharing my thoughts:
Once again, ashortcoming in the operational sector of the Affordable Care Act wreaks an injustice.
Ed Zollars had something in Current Federal Tax Developments. Russ Fox in Taxable Talk had something aptly titled The Law Isn’t Fair, But You Have to Pay the Tax.
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