It is estimated that as many as three million taxpayers who received Obamacare health insurance premium subsidies during 2014 (also called premium tax credits) will have to pay all or part of them back with their 2014 taxes. This is because they underestimated what their 2014 income would be and therefore qualified for a smaller credit than was actually paid during 2014. The repayments due for such excess credits are added to other taxes due on the taxpayer’s 2014 return. Some taxpayers who received substantial premium credits may end up owing thousands in additional taxes.
It’s likely that many of these taxpayers will not be able to pay the additional tax they owe by April 15, 2015. Under regular IRS rules, a failure-to-pay penalty automatically applies to any taxpayer who fails to pay the full amount due on his or her return by April 15. The penalty is equal to 0.5% of the unpaid balance per month, up to a maximum of 25% of the amount due. Thus, for example, a taxpayer who owes $1,000 in unpaid taxes due to excess Obamacare credits could end up owing a penalty of as much as $250.
Fortunately, the IRS is going to provide taxpayers in this situation with some relief. The IRS has announced that, for 2014 returns only, it will waive the late payment penalty for the taxpayers, provided they meet the following requirements:
The IRS is also waiving penalties for underpayment of estimated tax attributable to the credit.
The IRS says that taxpayers should file their 2014 returns without including a payment for the excess credits that were received during 2014. IRS computers will automatically send them a notice demanding payment, with penalties. When responding to such a notice, taxpayers should submit a letter to the address listed in the notice containing the statement: “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.”
To request a waiver from the penalty for underpayment of estimated taxes, taxpayers should check box A in Part II of Form 2210, complete page 1 of the form, and include the form with their return, along with the statement: “Received excess advance payment of the premium tax credit.”
Taxpayers do not need to attach documentation from the health insurance exchange, explain the circumstances under which they received an excess advance payment, or complete any page other than page 1 of the Form 2210. Taxpayers also do not need to figure the amount of penalty for it to be waived.
Although the IRS is waiving the late payment and estimated tax underpayment penalties, taxpayers will still need to pay regular interest on the amount they owe until it is fully paid. Moreover, if you file your return after April 15, 2015, you must fully pay the underlying liability by April 15, 2016 to be eligible for late penalty relief.
For more details, see IRS Notice 2015-9 on the IRS website.