IRS Shakedown Happening in Bankruptcy Court
By Cathy Moran , Esq . Moran Law Group Mount View , California
This article first appeared at http :// www . bankruptcysoapbox . com / 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 .
OK .
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 .
National Association of Consumer Bankruptcy Attorneys Spring 2018 CONSUMER BANKRUPTCY JOURNAL 27