Don’t Be Fooled: IRS Is Still Enforcing Healthcare-Related Tax Provisions

If you’re on the receiving end of correspondence from the Internal Revenue Service (IRS), you’re not alone: it’s correspondence season. And the latest batch of letters to appear in mailboxes may focus on health care.

Correspondence season is the term that tax professionals use to describe the period after tax season officially ends. As the IRS processes tax returns, their systems are hard at work matching taxpayer data, checking for missing information and the like. The result? Those bills and notices that show up in your mailbox. 

(You can find out more about correspondence season here).

Earlier this month, the IRS announced that they have begun sending letters to taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. But crypto isn’t the only issue attracting attention. The IRS reviews and responds to many potential reporting omissions, including the failure to report health care coverage or pay the resulting penalty, for the 2018 tax year.

With respect to healthcare, the IRS had already indicated – back in 2017 – that it would not accept electronically filed tax returns where the taxpayer did not address the health coverage requirements of the Affordable Care Act (ACA) This was in contrast to the earlier filing season when the IRS took the position that it would accept and process tax returns where a taxpayer is silent on coverage. 

That matters because, as part of ACA, you’re required to demonstrate that you have health coverage. Over the past few years, taxpayers that didn’t have coverage must claim a waiver or exemption or be subject to a penalty called the shared responsibility payment (sometimes referred to as the Obamacare penalty).

However, a recent change in the law may have confused some taxpayers. As part of the Tax Cuts and Jobs Act (TJCA), the shared responsibility payment was reduced to zero. Some taxpayers assumed that, since the TCJA was passed in 2017, the zero payment was immediate. However, the reduction to zero didn’t take effect until this year (2019) and affects the return you’ll file in 2020. That means that the penalty was still in place for the 2017 and 2018 tax years.

The IRS reminded taxpayers earlier this year that “[t]axpayers who did not have coverage for the entire year and therefore can’t check the box generally must report a shared responsibility payment when they file. They will report this payment for each month that anyone listed on the tax return didn’t have qualifying health care coverage or a coverage exemption.”

But if you underpaid the penalty for the 2018 tax year, you may now receive a CP14H Notice. It’s important to read the notice carefully to find out your next steps. Don’t ignore the notice just because the penalty isn’t applicable for 2019.

(It is worth noting that the law prohibits the IRS from using liens or levies to collect the shared responsibility payment – you can read more about that here. However, the IRS can offset your tax refund to satisfy the liability.)

Depending on your situation, you may receive other ACA-related notices. Taxpayers should be mindful of the fact that ACA has not been repealed: the shared responsibility payment was merely reduced to zero. Other reporting requirements – especially for employers – remain in place. And like it or not, Congress has tasked the IRS with enforcement. That means that letters and other correspondence from the IRS related to ACA could find their way into your mailbox for months to come.

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