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Refund Claim for ACA Shared Responsibility Payment Was Properly Filed on Form 843

(Parker Tax Publishing March 2018)

The Third Circuit vacated a district court's decision that it lacked jurisdiction over a taxpayer's refund claim for a shared responsibility payment (SRP) under the Affordable Care Act because it was filed on Form 843, Claim for Refund and Request for Abatement, instead of on a Form 1040X. The court found that although a claim for a refund of income taxes must be made by filing an amended return, the SRP is a penalty, not a tax, so the taxpayer correctly filed a Form 843. Cash v. U.S., 2018 PTC 32 (3d Cir. 2018).

In April 2015, Robert and Gladys Cash filed their 2014 tax return reporting a $575 shared responsibility payment (SRP) because they did not maintain essential health coverage for 2014. They received a refund of $2,525 which was offset by $575 to satisfy their SRP liability.

In May 2015, the Cashes filed a Form 843, Claim for Refund and Request for Abatement, requesting a refund of the SRP and raising various constitutional objections to the assessment. The IRS responded that the Cashes had to file an amended return on Form 1040X in order to change any information on their original return. Instead of filing a Form 1040X, the Cashes filed suit in a district court in December 2015.

The government moved to dismiss the complaint for lack of jurisdiction. A magistrate judge concluded that the district court lacked jurisdiction because the Cashes had used an improper form and therefore failed to exhaust their administrative remedies. The district court adopted the magistrate judge's report and dismissed the complaint. The Cashes appealed to the Third Circuit.

Under Code Sec. 7422, a taxpayer can sue the government for a refund only after paying the tax, duly filing an administrative claim, and waiting six months. The regulations under Code Sec. 6402 provide that the method for claiming a refund of income taxes is to file an amended return on a Form 1040X, while a claim for a refund of penalties must be made on Form 843. The Cashes argued that the SRP was not a tax but a penalty, so Form 843 was the proper form. They cited National Federation of Independent Business (NFIB) v. Sebelius, 2012 PTC 167 (2012), which held that the SRP could be constitutionally upheld as a tax but is a penalty for other purposes.

The government argued, and the district court agreed, that under Pennoni v. U.S., 32009 PTC 22 (Fed. Cl. 2009), the penalty/tax distinction was irrelevant and the proper focus was on the IRS's actions. In Pennoni, the IRS issued an erroneous refund and then levied the taxpayer's wages to recover the refund. The taxpayer argued that he was not required to file a Form 1040X to exhaust his refund claim because it was a nontax debt and he therefore had no tax liability. The Court of Federal Claims rejected that argument and determined that the correct focus was on the IRS's use of its collection powers, rightly or wrongly, to recoup what it asserted were overdue taxes. Applying Pennoni, the district court determined that the Cashes were seeking a refund of income taxes withheld and paid over to the IRS, and the correct procedure for making such a claim was to file a Form 1040X.

The Third Circuit disagreed with the IRS and the district court, holding that the SRP is a penalty and the Cashes corrected applied for a refund by filing Form 843. First, the Third Circuit noted the Supreme Court's emphasis in NFIB on the distinction between taxes and penalties throughout the Code. The Supreme Court reasoned in NFIB that Congress chose to call the SRP a penalty, not a tax, and it should be presumed that such a distinction was intentional. Further, the ACA commands that the SRP be assessed and collected in the same manner as taxes, and the Supreme Court pointed out that this directive would not make sense if the SRP were itself a tax under the Code. Thus, according to the Third Circuit, even if the SRP could be characterized as a tax for constitutional purposes, it is treated as a penalty for statutory purposes, and individuals should be able to rely on the clear and unequivocal text of the Code and regulations when dealing with the refund process. In the view of the Third Circuit, there was no basis for the reference to a penalty in the Code to have a different meaning in the regulations or on IRS forms.

The Third Circuit also rejected the district court's interpretation of Pennoni. Although it was true that the Cashes' tax return was the mechanism used to collect the SRP, and the amount was set off against their income tax refund, the Third Circuit found that the payment was remitted to the IRS as a penalty. The action that the Cashes were challenging in their refund claim was the assessment of this penalty, not the withholding of income taxes, so Form 843 was the proper form. The Third Circuit further reasoned that Form 1040X is used to change information provided on an original return, but the Cashes were disputing not the amount of the SRP but the government's authority to assess it. Moreover, the instructions for Form 1040X clearly state the form is not to be used to request a refund of penalties.

For a discussion of refund procedures, see Parker Tax ¶261,100. For a discussion of the SRP, see Parker Tax ¶190,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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