Obamacare penalties and IRS tax debts

Obamacare imposes a penalty on individuals if they don't carry health insurance and don't qualify for an exemption. The maximum Obamacare penalty for 2016 is $2085, increasing from $975 in 2015. This penalty is called the "Shared Responsibility Payment," or "SRP." The IRS is in charge of administering assessment and collection of the SRP.


However, due to how the law was written, the IRS does not have the same ability to collect the SRP as it does with unpaid income taxes. The IRS may levy or garnish bank accounts and wages to pays for tax debts, but the IRS cannot do so for SRP balances. For these Obamacare penalties, the IRS is usually left to intercepting refund checks, if any.


For many people, they have owed or will owe taxes along with an SRP. The problem is that new IRS tax debts default tax settlements — both installment agreements and Offers in Compromise. So how does the SRP work with both accepted and proposed installment agreements and Offers in Compromise?


You have an existing installment agreement and you incur additional SRP penalties only

Suppose you are in an installment agreement for tax years 2012-2013. You have been making all of your payment on time. Then, in 2015, you incurred additional Obamacare penalties of $975. Typically, when you incur an additional tax debt for another tax year, the IRS will default any installment agreement you have and may come back at you harder, demanding more.


So will this $975 SRP default your 2012-13 installment agreement?


No. You can continue to accrue SRP penalties for as long as you wish without defaulting your existing IRS installment agreement.  The government will be mostly limited to intercepting your refunds to pay for the SRPs, while your installment agreement payments are being allocated to your tax debt.


You have an existing installment agreement and you incur an SRP and tax liabilities

Let us suppose that you owe taxes for 2013-2014 and you also owe an $975 SRP penalty. You are paying your tax debt down with an installment agreement. Then, in 2015 you incur an additional $10,000 in tax debt. In this case, it would be the additional taxes that would default your existing installment agreement. You will likely have to renegotiate your tax debt…but when you do, you'll have to include your 2015 $10,000 tax debt along with your 2015 SRP penalty!


Do you see the difference? When renegotiating a tax debt, you have to include the SRP in the balance owed.


You owe taxes and SRP and want to get an Offer in Compromise

You also may be able to negotiate down your tax debt with an Offer in Compromise. But questions arise; can you include an SRP in with your back taxes that you owe? And should you include any SRPs in your balance?


The answers to both questions are yes and yes.


You can include your SRP, and you really should include it. Again, while the IRS can't collect SRPs in the same way as tax debts, it sort of make sense to make them both go away. It's better to owe nothing to the IRS than something, right?


You had an Offer in Compromise accepted, but you have have just been assessed with an SRP. Will this SRP default your Offer in Compromise?

Once an Offer in Compromise is accepted and paid, one of the conditions of any accepted Offer is that you remain in compliance for 5 years since the date the offer was accepted. This means you must file tax returns when you are required to file, and you must not incur additional tax debts. If an Offer in Compromise is defaulted, the entire tax debt that was settled will come back — and the IRS will seek to collect it.


So this begs the question, if you had an Offer in Compromise accepted an you paid it in full, then you incur an SRP, will that $975 penalty default your entire Offer in Compromise? The good news is no. For now.


If you have a tax issue that you need assistance with, contact us to schedule your free, confidential consultation. Call us at 888-727-8796 or email infor@irsmedic.com.

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Resource: Treasury Inspector General Report September 19, 2016