The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year.

The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year. Before 2022, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. However, now, a single transaction exceeding $600 can trigger a 1099-K The Service emphasized that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable. Taxpayers can access Form 1099-K, its instructions and a set of answers to frequently asked questions on the IRS web site.

In addition, the Service reminded taxpayers that they must pay income tax either through withholding or estimated tax payments. Taxpayers should use estimated tax payments to pay other taxes such as self-employment tax and the alternative minimum tax. IRS Publication 17, Your Federal Income Tax (for Individuals), provides general rules to help taxpayers pay the income taxes they owe. Additional helpful information is available in Chapter 5, Business Income, of Publication 334, Tax Guide for Small Business; Publication 525, Taxable and Nontaxable Income, and on the IRS website at Understanding Your Form 1099-K.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Before 2022, reporting was required only when a third-party settlement organization (TPSO) made more than 200 payments to a payee that totaled more than $20,000 for the year. However, beginning in 2022, a TPSO must report a payee’s payments once they total $600, regardless of their number.

The IRS recently updated its Form 1099-K Frequently Asked Questions (FAQs) to help taxpayers understand who files the form, who receives it, and what it means. The updated FAQs are divided into five sections.

1. General

The General section of the FAQs explains that the IRS will also use Forms 1099-K for systemic computer matching to tax returns to identify potential unreported income. The agency will also use the information to develop taxpayer education and outreach efforts, as well as new approaches to audits and collection.

2. Definition

The second section of the FAQs defines several relevant terms, including:

• Payment cards (credit cards, debit cards, gift cards, etc.)
• Merchant category code
• Third-party settlement organization (TPSO)
• Merchant acquiring entity
• Participating payee
• Gross amount of reportable transactions.

3. Individuals

The third section of the FAQs explains who will receive a Form 1099-K and who will not. An individual who receives a form should use the information to compute gross sales and receipts, and correctly calculate gross income.

An individual who has questions about the form, believes it was issued in error, or believes it includes incorrect information should generally contact the form’s issuer. The individual may also contact the payment settlement entity (PSE) whose name and phone number appear on the form.

4. Reporting

The reporting section of the FAQs explains due dates for filing Form 1099-K with the IRS and providing a copy to the payee. This section also reiterates that the form must report the gross amount of the payee’s reportable transactions, with no adjustments for fees, refunds, and other adjustments.

5. Filing Form 1099-K

Finally, the last section of the FAQs explains which party is responsible for filing which forms. For example, a merchant acquiring entity is responsible for filing some Forms 1099-K, while a third-party settlement organization is responsible for filing others.

Reportable payments include payments to a government unit or a foreign payee. However, they do not include payments that are reportable under Code provisions other than Code Sec. 6050W.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Draft partnership instructions for the 2022 Schedules K-2 and K-3 (Form 1065) and partner’s instructions for the 2022 Schedule K-3 were released October 25. The instructions add a “domestic filing exception” for a partnership that meets all four of the following requirements for its 2022 tax year:

• The partnership has:
  • no foreign activity, defined as foreign income taxes paid or accrued, foreign source income or loss, or an ownership interest in a foreign partnership, corporation, foreign branch, or foreign disregarded entity, or
  • foreign activity that is limited to passive category foreign income generating no more than $300 of taxes subject to the foreign tax credit (and shown on a payee statement);
• All of the partners are U.S. citizens or resident aliens, domestic decedent’s estates with only U.S.-citizen or resident-alien beneficiaries, domestic grantor trusts with only U.S.-citizen or resident-alien grantors and beneficiaries, or domestic non-grantor trusts with only U.S.-citizen resident-alien beneficiaries;
• The partners receive a notification from the partnership electronically or by mail, dated no later than two months before the due date of the partnership’s return, that the partners will not receive Schedules K-3 unless they request them; and
• The partnership does not receive a request from any partner for Schedule K-3 at least one month before the due date of the return (that is, a calendar-year partnership does not receive any requests by February 15, 2023).

A partnership that receives a timely request from a partner for a Schedule K-3 does not qualify for the domestic filing exception and must file Schedules K-2 and K-3 with the IRS and provide Schedule K-3 to the requesting partner. However, the partnership only needs to complete the parts of Schedules K-2 and K-3 that are relevant to that partner.

If a partnership receives a request from a partner for a Schedule K-3 after the one-month date but no requests by that due date, the partnership only needs to provide Schedule K-3 to the requesting partner by the date on which the partnership files its return or one month after it receives the request, whichever is later.

The draft instructions note that if a partnership fails the domestic filing exception test, it may still qualify for an exception to the filing requirement if all of its partners are eligible for the exemption from filing Form 1116.

A regularly updated IRS FAQ sheet on Schedules K-2 and K-3 states that "comments on the draft instructions can be provided to lbi.passthrough.international.form.changes@irs.gov on or before November 8, 2022."

The draft instructions also add guidance on when a domestic partnership with only domestic activity needs to file Schedules K-2 and K-3, on reporting capital gains and losses and foreign tax redeterminations, and on reporting income inclusions required by 2022 regulations that apply aggregate treatment to domestic partnerships in some situations.

Draft instructions for S corporations’ 2022 Schedules K-2 and K-3 have not been issued yet.

The Tax Court set aside Notice 2017-10, 2017-4 I.R.B. 544, while adjudicating a series of consolidated cases involving limited liability companies (LLCs) and conservation easements, because it was improperly issued by the IRS without meeting the notice and comment requirements under the Administrative Procedure Act (APA).

The Tax Court set aside Notice 2017-10, 2017-4 I.R.B. 544, while adjudicating a series of consolidated cases involving limited liability companies (LLCs) and conservation easements, because it was improperly issued by the IRS without meeting the notice and comment requirements under the Administrative Procedure Act (APA). Notice 2017-10 identified as listed transactions for purposes of Reg. §1.6011-4(b)(2) all syndicated conservation easement transactions, including all substantially similar transaction, entered into on or after January 1, 2010. The IRS had conducted examinations of the taxpayers’ Forms 1065, U.S. Return of Partnership Income, and disallowed the claimed deductions for noncash charitable contributions. In addition, each notice of final partnership administrative adjustment asserted a gross valuation misstatement penalty, a substantial valuation misstatement penalty, a negligence penalty, a substantial understatement penalty and an additional reportable transaction penalty.

The Tax Court held that Notice 2017-10 was a legislative rule because it created new substantive reporting obligations for taxpayers and material advisors, the violation of which prompted exposure to financial penalties and sanctions. Because the notice was a legislative rule, it should have gone through the notice-and-comment rulemaking under the APA. Moreover, Congress did not expressly authorize the IRS to identify a syndicated conservation easement transaction as a listed transaction without following the APA’s notice-and-comment procedures. In these consolidated cases, Notice 2017-10 was not issued until the tax year at issue. Accordingly, the court did not apply Notice 2017-10 retrospectively and disagreed that prior notice and comment made at the time of promulgation of Reg. §1.6011-4 satisfied the IRS’s ongoing obligation to comply with the APA when issuing Notice 2017-10. The Tax Court also concluded that the Congress had made it clear that each substantive rule of general applicability, including any amendment or revision, must comply with the APA. Consequently, the taxpayers’ cross-motions for summary judgment was granted in part, and Notice 2017-10 was set aside. Finally, Code Sec. 6662A penalties were not imposed with respect to reportable transactions.

Four concurring and two dissenting opinions were filed. The dissenting opinions focused on the express reference to Code Sec. 6011 in Code Sec. 6707A when it was enacted, and that the IRS had already identified 30 listed transactions by 2004 when Code Sec. 6707A was enacted without adherence to the APA's notice-and-comment requirements. In addition, when Code Sec. 4965 was enacted in 2006, the conference report defined a listed transaction as a tax avoidance transaction "identified by notice, regulation, or other form of published guidance as a listed transaction."

The Department of the Treasury outlined how the Inflation Reduction Act’s tax incentives will support the building of an equitable clean energy economy.

The Department of the Treasury outlined how the Inflation Reduction Act’s tax incentives will support the building of an equitable clean energy economy.

In a fact sheet issued October 26, 2022, the Treasury Department highlighted four key areas the tax policy built on the Inflation Reduction Act will drive clean energy:

• the IRA will provide targeted incentives to drive investment and create opportunity in communities across the country;
• the IRA will encourage clean energy project developers to meet strong labor standards, so that the benefits of building a clean energy economy are felt by workers making it happen;
• the IRA will lower the costs of energy-saving property improvements and rooftop solar installation, saving working families and small businesses money on their monthly utility bills and empowering families and businesses to shield themselves from volatile fossil energy prices; and
• The IRA allows state, local, and Tribal governments, as well as non-profit organizations and other tax-exempt entities, such as rural electric co-operatives, to receive certain tax credits as payments, expanding the range of actors that will have a direct incentive to invest in their communities.

According to the fact sheet, the law will "provide bonuses for investing in low-income communities, as well as in communities that have historically depended on the energy sector for jobs and economic activity."

To help incentivize this, the IRA modifies and extends the clean energy Investment Tax Credit "to provide a 30 percent credit for qualifying investments in wind, solar, energy storage, and other renewable energy projects that meet prevailing wage standards and employ a sufficient portion of qualified apprentices from registered apprenticeship programs."

It also modifies and extends the Renewable Energy Production Tax Credit "to provide a credit of 2.5 cents per kilowatt-hour in 2021 dollars (adjusted for inflation annually) of electricity generated from qualified renewable energy sources."

Other tax credits extended and/or expanded include the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit, and the Energy Efficient Commercial Buildings Deduction.

These incentives were discussed as part of an October 26, 2022, virtual roundtable hosted by Treasury Secretary Janet Yellen, during which she "emphasized that the Inflation Reduction Act provides long-term clarity and certainty for the clean energy sector, and underscored Treasury’s commitment to work expeditiously to provide guidance so that investments can move forward and our climate and economy can realize the benefits of the law as quickly as possible."

The IRS-Criminal Investigation (IRS-CI) has released its Fiscal Year 2022 Annual Report. The report details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began October 1, 2021 and ended September 30, 2022. Over 2,550 criminal investigations, the identification of more than $31 billion from tax fraud and financial crimes, and a 90.6 percent conviction rate are just a few highlights of the report.

The IRS-Criminal Investigation (IRS-CI) has released its Fiscal Year 2022 Annual Report. The report details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began October 1, 2021 and ended September 30, 2022. Over 2,550 criminal investigations, the identification of more than $31 billion from tax fraud and financial crimes, and a 90.6 percent conviction rate are just a few highlights of the report.

In fiscal year 2022, IRS-CI expanded partnerships with foreign counterparts to help combat tax and financial crimes on a global level. IRS-CI special agents delivered trainings in countries like Argentina, Germany, Colombia, and Palau on topics ranging from cybercrime to human trafficking. IRS-CI Mexico City, after changes to Mexico law that enabled the extradition of tax fugitives, launched an initiative to identify fugitives who had absconded to Mexico and nearby countries. This initiative resulted in the location of 79 criminal fugitives and the apprehension of eight during the first year. The report also includes additional case examples for each U.S. field office, an overview of IRS-CI’s international footprint, details about the specialized services provided by IRS-CI and investigative statistics, broken down by discipline, for fiscal year 2022.

Report Details

The Internal Revenue Service’s Criminal Investigations division earned convictions in 90.6 percent of its cases in fiscal year 2022, according to the division’s annual report.

CI Chief Jim Lee called the conviction rate "the statistic I continue to be most proud of" in the division’s annual report released November 4, 2022. "We are thorough and good at what we do. As I tell crowds around the country, if a CI special agent has you in their crosshairs, there is a good chance you are going to jail."

The report notes that of the 1,837 cases referred for prosecution, 1,564 cases resulted in convictions. CI identified $32.6 billion in financial crimes, $5.7 billion of which were classified as tax fraud.

"While navigating our way through the backend of a global pandemic, we seized record amounts of data and cryptocurrency, led some of the largest tax cases on record and spearheaded first-of-its-kind national and international initiatives aimed at developing and strengthening partnerships in the public and private sectors," Lee said in the report.

In terms of tax crimes, the report highlights four key areas that the division focused on

• General tax fraud;
• Refund Fraud Program;
• Abusive tax schemes; and
• Employment tax fraud.

The Refund Fraud Program has three parts – the Questionable Refund Program, the Stolen Identity Refund Fraud investigations, and the Return Preparer Program for both individuals and businesses. Each of these programs looks out for criminals who file fraudulent tax returns to steal government funds.

"This type of theft erodes voluntary compliance and taxpayer confidence in the integrity of the tax system," the report states. "It also results in the loss of vital funds needed to support government programs, many of which impact the most vulnerable Americans."

Areas the division focus on related to non-tax crimes include money laundering, public corruption, corporate fraud, general fraud, and the Bank Secrecy Act Program, which focuses on fraud using foreign bank accounts.

CI also focuses on cybercrimes and in 2022, it was a part of the largest single financial seizure in government history with "the arrest of Ilya Lichtenstein and his wife, Heather Morgan, for an alleged conspiracy to launder cryptocurrency that was stolen during the 2016 hack of Bitfinex, a virtual currency exchange," the report states. "Approximately 119,754 bitcoin (BTC) was stolen from the exchange and was valued at approximately $4.5 billion at the time of the arrest. The CI Cyber Crime Unit, with the assistance of other U.S. authorities traced the stolen funds."

Changes made by the Inflation Reduction Act of 2022 ( P.L. 117-169) are reflected in draft forms and instructions

Changes made by the Inflation Reduction Act of 2022 ( P.L. 117-169) are reflected in draft forms and instructions for:

• Form 8908, Energy Efficient Home Credit, and
• Form 8911, Alternative Fuel Vehicle Refueling Property Credit

Energy Efficient Home Credit

The Inflation Reduction Act extends the Code Sec. 45L energy efficient home credit to cover qualified new energy efficient homes sold or leased after 2021 and before 2033. The Act also increases and modifies the credit for homes sold after 2022.

The draft Form 8908 and the draft instructions reflect both the 2022 version of the credit and the post-2022 version. The IRS intends that contractors use the revised form and instructions for tax years beginning in 2022 or later. For tax years beginning before 2022, contractors should use the appropriate prior revision of the form.

Alternative Fuel Vehicle Refueling Property Credit

The Inflation Reduction Act extends the Code Sec. 30C alternative fuel vehicle refueling property credit to cover refueling property placed in service after 2021 and before 2033. The Act also modifies the credit for certain refueling property placed in service after 2022.

The draft Form 8911 and the draft instructions reflect both the 2022 version of the credit and the post-2022 version. The draft form divides Lines 4 and 5 to break out amounts subject to the lower credit rate for refueling property placed in service after 2022 that does not meet new prevailing wage and apprenticeship requirements.

The IRS intends that taxpayers use the revised form and instructions for tax years beginning in 2022 or later. For tax years beginning before 2022, the taxpayers should use the appropriate prior revision of the form.

The Internal Revenue Service is estimating the tax gap on tax years 2014-2016 to be $496 billion, an increase of more than $58 billion from the prior estimate.

The Internal Revenue Service is estimating the tax gap on tax years 2014-2016 to be $496 billion, an increase of more than $58 billion from the prior estimate.

"The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance," IRS Commissioner Charles Rettig said in a statement, adding that the recent funding in the Inflation Reduction Act "will help the IRS in many ways, increasing taxpayer education, significantly improving services to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers."

IRS published a report on the new estimate on October 28, 2022.

According to the report, the estimated net compliance rate is 87 percent, defined as tax paid voluntarily and timely plus enforced and other late payments divided by the total true tax. The voluntary compliance rate, which is the amount of tax paid voluntarily and timely divided by the total true tax is estimated to be 85.0 percent.

The tax gap includes three components, including:

• nonfiling (tax not paid on time by those who do not file on time) - $39 billion;
• underreporting (tax understated on timely filed returns) - $398 billion; and
• underpayment (tax that was reported on time, but not paid on time) - $59 billion.

The report estimates that $68 billion of the tax gap will eventually be paid.

The IRS also reported that the tax gap for years 2017-2019 is projected to increase to $540 billion.

Former Internal Revenue Service Commissioner Charles Rettig used his farewell message to highlight the work the agency’s workforce did during his four-year term as commissioner, particularly during the COVID-19 pandemic, but also during more normal times.

Former Internal Revenue Service Commissioner Charles Rettig used his farewell message to highlight the work the agency’s workforce did during his four-year term as commissioner, particularly during the COVID-19 pandemic, but also during more normal times.

"My time as Commissioner has given me an even deeper appreciation of what our workforce is capable of achieving," Rettig wrote in his message posted November 11, 2022, on the IRS website. "I have been constantly amazed at the accomplishments of IRS employees during what has been a challenging and historic time for our nation. Time and again I have seen them deliver for taxpayers under tight timeframes and difficult circumstances – responding in a manner that demonstrates the importance of every American to the IRS and the IRS to every American."

He noted a number of accomplishments of the workforce, including disbursing COVID relief payments of more than $830 billion while the agency was still working to conduct its normal business operations, which included delivering more than $1.5 trillion in refund payments and making more than 200 million advanced payments of the Child Tax Credit totaling $93 billion.

"It's also important to realize that, during this pandemic period, our employees faced the same health and safety concerns for themselves and their families as everyone else," he added. "Nonetheless, they went the extra mile in doing their jobs, and they also made a difference in their communities."

But he also praised the employees of the agency for stepping up even when there was no disaster requiring immediate actions.

"IRS employees don’t wait for a disaster to pitch in," he wrote. "They routinely give back – by collecting food for the hungry, volunteering to help low-income people, older Americans or underserved people prepare their tax returns, and in so many other ways. IRS employees make a difference, they care, and they take pride in serving taxpayers, tax professionals, and our country, on and off the job."

Rettig also identified a number of accomplishments he was proud of during his time, particularly getting publications out in more languages to help the agency reach a wider audience and make its activities more accessible to Americans, as well as making the Form 1040 available in Spanish for the first time during the 2021 tax filing season.

He also highlighted the work of Criminal Investigations during his time.

"There are many examples, but one I’d like to highlight involves agents from CI’s Cyber Crimes Unit," he wrote. "These agents played a key role in the largest cryptocurrency seizure ever recorded for the federal government, valued at more than $3.6 billion. This involved an alleged conspiracy to launder cryptocurrency stolen from a virtual currency exchange called Bitfinex. This was also the largest single financial seizure recorded by the federal government."

The Next Steps

In addition to highlighting the accomplishments of the agency, he also pointed to the direction he leaving the agency headed, including modernizing the IRS’ information technology infrastructure, both hardware and software.

"An important part of our modernization strategy involves expanding our digital services, to give everyone a seamless experience when they interact with the IRS online," he wrote. "A great example is the IRS Online Account. We are continually working to expand the transactions that individuals can conduct through this account. Last year, for example, we launched a new feature allowing people to authorize their tax practitioner to represent them before the IRS with a Power of Attorney, and to view their tax accounts with a Tax Information Authorization."

He continued: "At the same time, we realize that there is still much for us to improve on to help taxpayers and the tax system. Our employees know we need to do more. The IRS continues to focus on reducing paper correspondence inventory and processing paper tax returns from 2021 as well as work on our response to an unprecedented level of phone demand – situations that have been compounded by the pandemic and related issues. Actions we’ve taken to address the inventory include surge teams, mandatory overtime, innovating to expedite case closures and suspending various notices. We are continuing to work hard on this area, and the efforts of our hard-working employees are enabling significant progress."

Other challenges he noted include the thwarting of identity thieves and improving work in underserved communities, areas that will benefit from the funding received from the Inflation Reduction Act. And he has faith the leadership and the workforce is up to meeting the challenges ahead.

"Although the IRS is a large government institution, it’s an institution run by people –people who care," he wrote. "The IRS has made great strides over the last four years, but as always, IRS employees want to do more, and I know they will continue moving forward in every area, in service to our great nation."

The Affordable Care Act—enacted nearly five years ago—phased in many new requirements affecting individuals and employers. One of the most far-reaching requirements, the individual mandate, took effect this year and will be reported on 2014 income tax returns filed in 2015. The IRS is bracing for an avalanche of questions about taxpayer reporting on 2014 returns and, if liable, any shared responsibility payment. For many taxpayers, the best approach is to be familiar with the basics before beginning to prepare and file their returns.

The Affordable Care Act—enacted nearly five years ago—phased in many new requirements affecting individuals and employers. One of the most far-reaching requirements, the individual mandate, took effect this year and will be reported on 2014 income tax returns filed in 2015. The IRS is bracing for an avalanche of questions about taxpayer reporting on 2014 returns and, if liable, any shared responsibility payment. For many taxpayers, the best approach is to be familiar with the basics before beginning to prepare and file their returns.

Individual mandate

Beginning January 1, 2014, the Affordable Care Act requires individuals (and their dependents) to have minimum essential health care coverage or make a shared responsibility payment, unless exempt. This is commonly called the "individual mandate."

Employer reporting

Nearly all employer-provided health coverage is treated as minimum essential coverage. This includes self-insured plans, COBRA coverage, and retiree coverage. Large employers will provide employees with new Form 1095-C, Employer-Provided Health Insurance Coverage and Offer, which will report the type of coverage provided. The IRS has encouraged employers to voluntarily report starting in 2015 for the 2014 plan year. Mandatory reporting begins in 2016 for the 2015 plan year.

Marketplace coverage

Coverage obtained through the Affordable Care Act Marketplace is also treated as minimum essential coverage. Marketplace enrollees should expect to receive new Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace. Individuals with Marketplace coverage will indicate on their returns that they have minimum essential coverage. Because so many individuals with Marketplace coverage also qualify for a special tax credit, they will also likely need to complete new Form 8962, Premium Tax Credit (discussed below).

Medicare, Medicaid and other government coverage

Medicare, TRICARE, CHIP, Medicaid, and other government health programs are treated as minimum essential coverage. There are some very narrow exceptions but overall, most government-sponsored coverage is minimum essential coverage.

Exemptions

Some individuals are expressly exempt under the Affordable Care Act from making a shared responsibility payment. There are multiple categories of exemptions. They include:

• Short coverage gap
• Religious conscience
• Federally-recognized Native American nation
• Income below income tax return filing requirement

The short coverage gap applies to individuals who lacked minimum essential coverage for less than three consecutive months during 2014. They will not be responsible for making a shared responsibility payment. Individuals who are members of a religious organization recognized as conscientiously opposed to accepting insurance benefits also are exempt from the individual mandate. Similarly, members of a federally-recognized Native American nation are exempt. If a taxpayer’s income is below the minimum threshold for filing a return, he or she is exempt from making a shared responsibility payment.

The IRS has developed new Form 8965, Health Coverage Exemptions. Taxpayers exempt from the individual mandate will file Form 8965 with their federal income tax return.

Shared responsibility payment

All other individuals - individuals without minimum essential coverage and who are not exempt - must make a shared responsibility payment when they file their 2014 return. For 2014, the payment amount is the greater of: One percent of the person’s household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014. Taxpayers will report the amount of their individual shared responsibility payment on their 2014 Form 1040.

The IRS has cautioned that it will offset a taxpayer’s refund if he or she fails to make a shared responsibility payment if required. However, the Affordable Care Act prevents the IRS from using its lien and levy authority to collect an unpaid shared responsibility payment.

Code Sec. 36B credit

Only individuals who obtain coverage through the Marketplace are eligible for the Code Sec. 36B premium assistance tax credit. The U.S. Department of Health and Human Services (HHS) has reported that more than two-thirds of Marketplace enrollees are eligible for the credit and many enrollees have received advance payment of the credit.

All advance payments of the credit must be reconciled on new Form 8962, which will be filed with the taxpayer’s income tax return. Taxpayers will calculate the actual credit they qualified for based on their actual 2014 income. If the actual premium tax credit is larger than the sum of advance payments made during the year, the individual will be entitled to an additional credit amount. If the actual credit is smaller than the sum of the advance payments, the individual’s refund will be reduced or the amount of tax owed will be increased, subject to a sliding scale of income-based repayment caps.

A change in circumstance, such as marriage or the birth/adoption of a child, could increase or decrease the amount of the credit. Individuals who are receiving an advance payment of the credit should notify the Marketplace of any life changes so the amount of the advance payment can be adjusted if necessary. Please contact our office if you have any questions about the Code Sec. 36B credit.

IRS officials have told Congress that the agency is ready for the new filings and reporting requirements. Our office will keep you posted of developments.

The answer is no for 2010, but yes, in practical terms, for 2014 and beyond. The health care reform package (the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010) does not require individuals to carry health insurance in 2010. However, after 2013, individuals without minimum essential health insurance coverage will be liable for a penalty unless otherwise exempt.

Shared responsibility

The health care reform package describes health insurance coverage as "shared responsibility." Individuals, employers, the federal government, and the states all have roles to play in guaranteeing that individuals do not lack minimum essential health insurance coverage.

The health care reform package assumes that employer-provided health insurance will continue to be the primary means of delivering coverage after 2013. The health care reform package includes measures that lawmakers hope will keep premium costs down along with tax incentives, so employers continue to offer health insurance. For larger employers (those with 50 or more employees), that "encouragement" is also combined with penalties if alternate health insurance is not offered.

Millions of Americans are also currently covered by Medicaid, Medicare and other government programs. They will continue to be covered by these programs after 2013. Indeed, some of these government programs will be expanded between now and 2013, covering more individuals.

Individual responsibility

Beginning in 2014, the health care reform package imposes a penalty on individuals for each month they fail to have minimum essential health insurance coverage for themselves and their dependents. Another name for the penalty is "shared responsibility payment."

As a baseline, all individuals without minimum essential health insurance coverage will be liable for the penalty. However, the health care reform package expressly excludes certain individuals from liability for the penalty. They include:

• Individuals whose household income is below their income thresholds for filing a federal income tax return;
  
• Individuals who are exempt on religious conscience grounds;
  
• Individuals whose contribution to employer-provided coverage exceeds a threshold percentage;
  
• Hardship cases;
  
• Native Americans;
  
• Undocumented aliens;
  
• Incarcerated individuals;
  
• Individuals with short lapses of minimum essential coverage;
  
• Individuals covered by Medicare, Medicaid and other government programs; and
  
• Certain individuals outside the U.S.

Amount of penalty

The monthly penalty after 2013 is 1/12 of the flat dollar amount or a percentage of income, whichever is greater. For 2014, the flat dollar amount is $95 and the percentage of income is one percent. The flat dollar amount rises to $695 in 2016 (indexed for inflation thereafter) and the percentage of income increases to 2.5 percent.

For individuals under age 18, the flat dollar amount is 50 percent of the amount for adults. Generally, a family's total penalty cannot exceed $285 for 2014 (rising to $2,085 by 2016) or the national average annual premium for the "bronze" level of coverage through a state insurance exchange. By 2014, each state must establish an insurance exchange where individuals can shop for health insurance coverage. The exchanges will have four levels of coverage: bronze, silver, gold, and platinum.

Example. Ana, age 38, is self-employed with a modified adjusted gross income (AGI) of $68,500 for 2014. Ana does not have minimum essential coverage for all 12 months of 2014 and is not exempt from carrying minimum essential coverage because of income or other qualifying reasons. Ana will be liable for a penalty of the greater of $95 or one percent of her modified AGI.

Example. Ana's mother, Barbara, is enrolled in Medicare. Barbara has minimum essential coverage because she is enrolled in Medicare and is not liable for a penalty.

Health insurance tax credits

At the same time the individual responsibility requirement kicks in, the health care reform package provides a refundable health insurance premium assistance tax credit to qualified persons. The premium assistance credit will operate on a sliding scale based on an individual's relationship to the federal poverty level (between 100 and 400 percent).

The healthcare reform package makes the premium assistance tax credit refundable and also provides for advance payment of the credit. Advance payment will be made to the health plan in which the individual is enrolled.

Adult children

There is one important change regarding individual coverage for 2010. Effective September 23, 2010, the health care reform package enables more young adults to remain on their parents' health insurance policies. Generally, employer-sponsored group health plans will be required to provide coverage for adult children up to age 26 if the adult child is ineligible to enroll in another employer-sponsored plan. The health care reform package also extends the employer-provided health coverage gross income exclusion to coverage for adult children under age 27 as of the end of the tax year.

Guidance

The IRS, the U.S. Department of Health and Human Services and other federal agencies are expected to issue extensive guidance on the individual responsibility mandate. Our office will keep you posted on developments.