This tax season, for the first time, the IRS intended to reject returns that were silent as to information related to the individual mandate under the Affordable Care Act. A silent return is any Form 1040 return where Box 61 is not checked, indicating full-year health insurance coverage, or where Forms 8965 and 8962 are not included, indicating that an exemption applies, or a premium tax credit was reconciled or a penalty payment is made.
But as a result of President Trump’s “Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal,“ the service reversed course earlier this month, saying that it would begin accepting such returns. In a statement, it noted that the law was still in effect, but said that the change will reduce the burden on taxpayers, including those expecting a refund.
The reversal may leave tax preparers in an untenable position, according to Beanna Whitlock, a Reno, Nev.-based practitioner and educator, and former director of IRS National Public Liaison. “The IRS doesn’t have the ability to go out and collect the penalty from a taxpayer for not having health insurance,” she explained.
“Suppose a taxpayer qualifies for the Earned Income Tax Credit and is entitled to a $6,000 refund on the return,” she said. “If they checked the box that they had no health insurance, the penalty on those children would reduce the refund from $6,000 to $4,000. But if they file without disclosing that, what will the IRS do?”
“If a taxpayer doesn’t have health insurance, the only way the IRS can collect the penalty is by deducting it from their refund,” she noted. “The IRS can’t overtly go after the penalty, but I believe they will go after it based on receiving too much refund.”
Nicole Elliott, a former IRS senior advisor for the Affordable Care Act and a current partner with Holland & Knight, agreed, and noted that it’s not a change from previous years. “In years past they were not rejecting these returns,” she said. “This year they were going to start rejecting them, but because of the executive order to make things nice for taxpayers, they decided not to enforce the new set of rules.”
“But even though they’re not rejecting them, the law is still the law until Congress acts,” she said. ”They’re trying to walk a fine line. They won’t make things more stringent this year, but they have three years to look at a return. Given the executive order, it’s unclear if they would be going after people, but they can always say, ‘We saw you had a refund but you had a silent return, could you give us some more information?’ They can do a correspondence audit they want to. It’s a bit unclear how they would do it, but they could slice and dice silent returns once they come in the door.”
To lessen the potential for post-filing-season problems for practitioners, Whitlock recommends they have the taxpayer sign the following disclosure if they decide not to check Box 61 on the return:
“In the course of the preparation of my 2016 U.S. Federal Income Tax Return, I have voluntarily chosen not to report whether there are individuals on this return for which the Individual Shared Responsibility Payment (Penalty for Not Having Health Insurance) would apply or that no one on this return had Health Insurance for which the penalty may apply.
“I understand that I may receive a communication from the Internal Revenue Service, experience delayed refunds, and face subsequent collection activity to recoup this payment.
“Although my return preparer has thoroughly explained the issue to me, I have made the decision not to complete Line 61 on the tax form and have so instructed my return preparer.
“I further understand that should I request my preparer’s additional assistance in this matter the fee paid for the preparation of the return does not include representing me in this matter should the need arise. Should I engage my preparer to represent me in the matter, I understand an additional fee will be required and determined at that time.”