Penalty Abatement Available Tied to Repayment of Premium Tax Credit

Some taxpayers have received advance credits on their health insurance purchased through the Marketplace.  Some of these taxpayers may not be fully aware of the requirement to calculate the actual Premium Tax Credit based on their actual 2014 income tax return.  Some of these calculations will result in taxpayers receiving an additional credit when they file their income tax returns, resulting in higher refunds.  Other taxpayers will find their advance credit is higher than the actual credit which means they will receive lower refunds or higher balances due.  A taxpayer who has a balance due could be liable for the penalty for underpaying estimated taxes.  A taxpayer who does not pay the balance due by April 15, 2015, would also be subject to the failure-to-pay penalty.

This is the first year of this Premium Tax Credit and many taxpayers may not have been aware of the calculation and possibility of having to repay some or all of the credit.  Thus some taxpayers may not have taken this into account when making their estimated tax payments.  Other taxpayers may not have the funds available to pay their balance due by April 15, 2015.

Notice 2015-09 provides taxpayers an abatement of penalties for underpayment of estimated taxes under Section 6654(a) and for the failure-to-pay penalty under Section 6651(a)(2) for any taxes due as a result of the requirement to repay part of the advance credit.  Interest will still be charged on any taxes not paid by April 15, 2015.  This relief is available only for 2014 returns.  This relief does NOT apply to taxes due to the shared responsibility penalty under Section 5000A since these are not subject to underpayment or failure to pay penalties.

To obtain the abatement relief taxpayers must file their 2014 returns by the due date (including valid extensions) showing the excess advance credit amount and be current with all tax filing and payment obligations.  If an amount of tax for another tax matter is unpaid, the taxpayer must have entered into an installment arrangement, offer in compromise, or both to satisfy the federal tax liability.  In addition the failure-to-pay penalty relief only applies if the taxpayer pays the entire balance by April 15, 2016 – in essence giving these taxpayers one extra year to pay the excess credit amount without incurring the penalty.  Interest will still be charged beginning April 15, 2015.

To obtain the relief for the underpayment of estimate tax penalty a taxpayer should check box A in Part II of Form 2210, complete page 1 of the form, and include the form with their income tax return, along with the statement “Received excess advance payment of the premium tax credit.”

To obtain the relief for the failure-to-pay penalty a taxpayer who receives the penalty notice from IRS should submit a letter to the address on the notice that contains the statement “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.”

This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).