Welp. Treasury Dept. comes up with innovative way to resolve the Form 8962 issue...

Hey, remember back in October when I was deeply concerned about the 1.5 million taxpayers receiving APTC (Advance Premium Tax Credits) via ACA exchange policies last year who were at risk of losing those tax credits this year because they either didn't know they had to file a tax return, knew but didn't get around to doing so, or filed their taxes but forgot to fill out/include Form 8962?

Remember how I later noted that my own wife and I were among those who fell into the second category? (Fortunately, we did file an amended return to take care of it.)

I never really heard much about it from either the IRS, the HHS Dept. or most of the exchanges after that (although a few exchanges did post reminders to their enrollees to double check to make sure they'd taken care of the form). The only concrete numbers I saw were from Connecticut, where in mid-December, Access Health CT stated that around 2,200 enrollees would likely lose their tax credits this year due to failure to file a return. At the time, I extrapolated that this might mean perhaps 250,000 people nationally, though obviously that wasn't much to base an estimate on. A follow-up article a week later stated that the number had been cut in half, to 1,100, in Connecticut.

Anyway, that was all I heard about the issue...until today (h/t to Josh Schultz for the link):

About 1.4 million households that got financial help for health insurance under President Barack Obama's law failed to properly account for it on their tax returns last year, putting their subsidies at risk if they want to keep coverage.

The preliminary figures were released by the IRS late Friday afternoon, a time when the government often reports unfavorable developments. A spokeswoman for the Department of Health and Human Services doubted there will be a major impact. HHS believes most of the people affected no longer have health law coverage.

Still, it's a potential complication as the Obama administration strives to increase enrollment for 2016 in the face of rising premiums and skeptical consumers. Tax issues highlight the difficulties of the health law for the very people it's intended to serve.

...Consumers can receive the tax credits in advance if they qualify. But when they file taxes the following year, they must account for the subsidies on their tax returns. People who fail to do that cannot get subsidies paid to them in advance the following year. Without financial assistance, health insurance premiums are unaffordable for many low- and moderate-income people.

IRS said the more than 1.4 million households that have failed to properly account for their 2014 tax credits include:

  • About 316,000 households that got tax credits paid to them in advance but did not file any return at all last year. Before the healthcare law, many low-income people were not required to file taxes. Now they must do so if they got a subsidy. But if taxpayers don't realize it, that can create mix-ups.
  • Some 976,000 households that got tax credits and filed 2014 returns, but omitted a new form that is the key to accounting for their subsidies. Called Form 8962, it was introduced for the 2015 tax filing season.
  • About 147,000 households that had requested extensions to file their 2014 taxes, but never followed through.

The consumers with tax issues represent about 30% of the 4.6 million households that had tax credits provided on their behalf.

Oy Vey Iz Mir.

This is actually far uglier than I had figured. I assumed the numbers mentioned back in July referred to people impacted, but apparently it refers to the number of returns filed (or, in 316,000 cases, not filed), which means households. Since around 8.7 million enrollees received at least one month's worth of tax credits last year, that's roughly 2.7 million individuals that we're talking about here. Good grief.

However, it appears that the Treasury Dept. has figured out a pretty simple solution for about 80% of the problem...

Friday night, a Treasury spokeswoman said that for this year, the IRS will only flag people who do not file a return at all to have their tax credits turned off. Nonetheless, the spokeswoman said it is important for all individuals to file the proper tax paperwork.

Huh. OK...so, apparently my wife and I might as well not have bothered filing that amended return after all.

It looks like the IRS has decided that the first year is a "gimme" for those who did file a return but forgot this particular form. Depending on whether they're including the 147K who requested extension but didn't actually file or not, that's either 68% or 78% of the total who are being given a pass this year.

As for the 316K (or 463K?) who didn't file at all, according to the HHS Dept., "most" of them dropped off their exchange policies at some point or another last year anyway (either earlier in the year or they just didn't renew their policies for 2016). I'm not sure how many "most" means, but assuming it's around 75% of them, that would leave something like 80K - 120K households...or 150K - 225K individuals, which is still a heck of a lot of people.

(sigh) I actually have mixed feelings about this, to be honest.

On the one hand, if you've never had to file a tax return before, I'm sure it's a new and potentially scary thing; tax returns can be very intimidating when you're not used to doing them. Heck, as I already noted, my own wife and I--both of whom have had to file fairly complex returns for years, since we're both self-employed--somehow managed to miss Form 8962 ourselves; it's brand new, there was only a fairly obscure reference to it in our tax paperwork last spring, and we never received a phone call, email or snail mail reminder from the IRS (the only way I knew that we had missed the form was from when we actually tried to re-enroll for this year via HC.gov and saw a warning notice...on the very last page of the application).

On the other hand, as I had noted back in October, it strikes me as being pretty naive of someone receiving federal tax credits to not even realize that they have to file a federal tax return at all. It's one thing to be a bit confused by the process; it's something else to not be aware that you even have to go through it, and it's another thing again to actually get angry about having to do so, as one woman in the NY Times article did:

Erin M. Lackey, 41, of Jacksonville, Vt., was one of many people who received letters from the I.R.S. saying they were at risk of losing their tax credits.

Her mother, Ruth J. O’Hearn, a nurse who helps her daughter with insurance matters, described her own reaction.

“At first, I was angry,” Ms. O’Hearn said. “Then I felt frustration and fear. You can’t be without insurance. Without the subsidy, health insurance would be unaffordable. Without insurance, the cost of medical care would be unaffordable.”

Frustration, I understand. Fear, I can understand. Anger, however? That strikes me as being unreasonable.

Anyway, hopefully, like so many other aspects of the law, people will figure it out and the incidents of this will settle down over the next year or two...but in the meantime, it sounds like perhaps 200,000 exchange enrollees may be in for an ugly wake-up call when they do their taxes this spring...