The latest IRS scam is happening in bankruptcy, out in the open.
Now usually when I write about IRS scams, I’m talking about genuine bad guys either pretending to be the IRS to hijack your money or pretending to be you to the IRS, to hijack your money.
But nobody is pretending in the trick I first saw last week. The IRS is simply trying to collect the Affordable Care Act penalty twice.
What the IRS did
My client filed Chapter 13, owing income taxes. The most recent of those taxes must be paid in full to get a Chapter 13 discharge. So, the amount that must be paid is critical to the success of the plan.
The IRS filed a proof of claim for the unpaid income taxes.
But then, weeks later, the IRS amended their claim to add an “excise tax”, for the penalty under the Affordable Care Act, for not having health insurance.
The IRS conveniently “overlooked” the fact that the filed tax return already included the penalty on line 61 of the 1040.
So, they wanted to get paid twice by putting a benign label, “excise tax”, on the form, and hoping that you didn’t dig deeper.
No right to double payment
The tax law for the years in question, 2015 and 2016, imposed a penalty for not having insurance, to be collected by the IRS.
The IRS form includes a line where you add the penalty to your taxes if you didn’t have appropriate insurance. So when my client filed his return, he’d already added the penalty to what he owed.
And the IRS dutifully used his return to claim payment for the unpaid amount.
But it’s not OK to double dip and add a duplicate penalty with another name.
When I challenged the IRS agent who filed the claim, his response suggests that he’d not looked at the client’s tax return; he’d just added the penalty to the claim by rote.
Conversations with fellow bankruptcy specialist William Brownstein suggests the IRS confusion runs more broadly on this issue. He reports the IRS assessing non-bankrupt tax payers with penalties for not including form 1095-B with their returns, even though the form itself says “don’t file with your return”.
So, the first step is to eliminate the duplicate claim.
But there’s more.
Is the ACA penalty entitled to priority payment
Recent taxes are given a priority for payment under the Bankruptcy Code. If the ACA penalty is a “tax” within the meaning of the Bankruptcy Code, it must be paid in full in Chapter 13.
But, is this exaction a tax?
A Louisiana bankruptcy court recently said no in a case called Chesteen. It’s not a tax, it’s a penalty. And as a penalty, it isn’t entitled to payment in full, and as a penalty, it is dischargeable at the completion of the plan. Great work by NACBA member Rachel Thyre Anderson, who reports that the decision has been appealed.
Where do we stand on ACA penalty
While the issue of whether the penalty is a tax or not may not yet be settled by the Chesteen decision, it is clear that the IRS, at best, only gets to collect the penalty once.
If the penalty is properly included on the tax return as filed, then any additional “excise tax” that claims priority status should be challenged.