Taxable Talk

Earlier today I saw a tweet from Joe Kristan:

New Notice 2016-4 extends deadline to provide employee 1095-B and -C copies from 2/1/16 to 3/31/16; 2/29 IRS copy deadline moved to 5/31/16

— Joe Kristan (@joebwan) December 28, 2015

The delay didn’t surprise me; I felt that given this was the first year that Form 1095-B and 1095-C were required that there would be issues. But I felt that taxpayers would eventually need to provide the forms to tax professionals.

I was wrong.

From Notice 2016-04:

Similarly, some individual taxpayers may be affected by the extension of the due date for providers of minimum essential coverage to furnish information under section 6055 on either Form 1095-B or Form 1095-C. Individuals generally use this information to confirm that they had minimum essential coverage for purposes of sections 36B and 5000A. Because, as a result of the extension, individuals may not have received this information before they file their income tax returns, for 2015 only individuals who rely upon other information received from their coverage providers about their coverage for purposes of filing their returns need not amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections. Individuals need not send this information to the Service when filing their returns but should keep it with their tax records. [emphasis added]

Do note that taxpayers aren’t getting a complete free ride here. The IRS reserves the right to challenge taxpayers who say they had coverage but didn’t (which is why the notice states to keep the information with the tax returns). However, given that the IRS can’t force taxpayers to pay penalties regarding health insurance coverage, it’s possible the IRS won’t be looking at this for 2015.

This is good news for tax professionals and taxpayers in another regard. We won’t have delays regarding filing returns because taxpayers haven’t received Forms 1095-B or 1095-C as long as they’re aware of their health insurance coverage. That’s a very good thing for all.

Or, first California, now the United States.

Last week I reported on Cover California’s error impacting an estimated 100,000 individuals who received incorrect Form 1095-A’s. It turns out that was just the tip of the iceberg. As reported by AP:

About 800,000 HealthCare.gov customers got the wrong tax information from the government, the Obama administration said Friday, and officials are asking those affected to delay filing their 2014 returns.

This represents one-fifth of the Form 1095-A’s sent out by the federal exchange. That means there are a lot of people who can’t correctly file taxes until the corrected 1095-A’s are sent out. That should hapen in a couple of weeks but there’s an issue that’s implicit in the AP story: The government isn’t sure how the error happened. If that’s the case there’s an obvious question; how do you know that the ‘corrected’ 1095-A’s are correct?

Given that the majority of Americans would like to see ObamaCare go to the scrap heap, I’m sure these new revelations will inspire more confidence in the law. Given further that it is also quite likely that the majority of those who received subsidies for health care will have to repay some to all of the subsidy on their tax returns, I’m sure even more people will embrace ObamaCare….

The Court of Appeals for the District of Columbia dealt the Obama Administration a major blow today when the court ruled 2-1 that only state health exchanges plans are eligible for tax subsidies. The IRS had promulgated a rule that health exchanges run by the federal government were eligible for the subsidies.

Here is the conclusion of the primary opinion:

We reach this conclusion, frankly, with reluctance. At least until states that wish to can set up Exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly. But, high as those stakes are, the principle of legislative supremacy that guides us is higher still. Within constitutional limits, Congress is supreme in matters of policy, and the consequence of that supremacy is that our duty when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process. This limited role serves democratic interests by ensuring that policy is made by elected, politically accountable representatives, not by appointed, life-tenured judges.

The basic issue is that the Affordable Care Act (aka ObamaCare) allows a tax credit for exchanges established by a state. Are federal exchanges established by a state? The court ruled they weren’t.

UPDATE: The Fourth Circuit ruled in a similar case that the IRS rule was valid. This is almost certainly heading to the US Supreme Court with a decision probably next June.

While this decision will be appealed (to either an en banc panel of the DC Circuit Court of Appeals or the US Supreme Court), it appears sound. The law is what’s written, and neither the Administration nor the IRS can avoid such bright lines.

This is likely to cause more headaches for both taxpayers and tax professionals next year. It is almost certain this case will be appealed, and the appeals will likely not be resolved until next Spring at the earliest. Will tax credits be allowed for an Exchange in, say, Kansas, where the Exchange is run by the federal government? I have no idea. Both California and Nevada have exchanges run by the state, so subsidies in these states appear legal. However, Nevada will be moving to a federal exchange for 2015 so this could have a major impact then (2015 returns prepared in 2016).

Have you ever lost something? Of course you have–we all have had experiences where we can’t find that paper we need. Of course, just after we get the second copy of the paper we find the original (Murphy’s Law at work). I’m sure most of us have misplaced some money or your wallet. However, I doubt that most of us have misplaced $67 million.

Earlier this week TIGTA, the Treasury Inspector General for Tax Administration, issued an audit on the Affordable Care Act. The report, dated September 18th, was sent out on the 25th and is titled, “Affordable Care Act: Tracking of Health Insurance Reform Implementation Fund Costs Could be Improved.”

I put the report aside until this morning, and was stunned when I read this paragraph:

Some Affordable Care Act Implementation Costs Were Inaccurate or Not Tracked and Supporting Documentation Was Not Always Maintained

Our review found that the tracking of costs related to the ACA implementation could be improved. Specifically, we found that costs charged to HIRIF funding relating to direct labor were sometimes inaccurate and not always substantiated by reliable supporting documentation. We also found that the IRS did not track all costs associated with implementation of the ACA, including costs not applied to the HIRIF. Specifically, the IRS did not account for or attempt to quantify approximately $67 million of indirect ACA costs incurred for FYs 2010 through 2012. Indirect costs include, for example, providing employees with workspace and information technology support.

There’s more, too. “The IRS did not track all costs associated with the implementation of the ACA.” Those indirect costs were not tracked. The IRS, which is not flush with funds, had the ability to get funding for indirect ACA costs by using funds from a $1 billion Health Insurance Reform Implementation Fund (HIRIF). However, IRS management did not believe that indirect costs should be recovered from HIRIF…so the IRS (and we, the taxpayers) are out those funds.

On the bright side, the IRS agreed with TIGTA’s recommendations in the report and will be tracking these costs in the future. Unfortunately, the HIRIF is likely gone for future years.

This is yet another black eye for the IRS.