Monday, January 6, 2014


Recently I have been pondering an ethical, or perhaps even a legal, question.

Under Obamacare, beginning with tax year 2014 a person or family that does not have proper health insurance coverage is subject to a penalty.  The penalty is not easy to determine – such as $100 per person for the year.  The process of calculating the penalty is truly a convoluted mucking fess.

In “How to Calculate Obamacare Penalties” the tax blogosphere’s MILWAUKEE CPA tries to explain the process.  He follows his attempt at an explanation with the following statement –

I think there are plenty of American taxpayers not to mention tax professionals, whose heads are spinning at the language, definitions and complications of deciphering the formulas. And obviously more than one formula must be used. In fact, the calculations have to be run three times. Using the term ‘greater than’ and ‘less than’ indicates a comparison and therefore requires the use of more than one formula to determine the correct answer.”

As a tax professional, having to calculate this Obamacare penalty will be a real pain in the arse, and a total waste of valuable tax season time. 

And, if I am to determine whether a taxpayer is subject to this penalty, I will, next tax season (in 2015), appear to have the added responsibility of verifying that a client has, or doesn’t have, appropriate health insurance coverage.  Another total waste of valuable tax season time.

As happened with the IRS’ excessive due diligence requirements for claiming an Earned Income Credit, the tax preparer is once again unnecessarily forced to also be a social worker.

Let’s be honest.  Whether or not a client has health insurance coverage really has absolutely nothing to do with preparing the 1040, other than that the idiots in Congress, who passed Obamacare without actually reading the Act, have made the payment of this complicated and ridiculous non-tax penalty an addition to one’s federal tax liability.

I do not want to have to ask my clients if they have health insurance coverage and determine if the coverage is adequate under Obamacare.  And I do not want to have to tell a client that the fee for his or her 1040 has increased because I had to waste time calculating his Obamacare penalty.

With the Earned Income Credit a client making a claim must pay more to have his or her tax return prepared – but he or she gets an additional refund, or pays less, because of the EIC.  With the Obamacare penalty the client is paying me a higher fee to charge him or her a penalty!  Hey, I can’t submit the bill for the additional time involved to BO. 
So where is the ethical or legal dilemma? 

Whenever I prepare an income tax return with a balance due I do not automatically check to see if the client is subject to a penalty for underpayment of estimated taxes.  If the IRS wants to charge the client this penalty let them do it themselves.  If a client receives an IRS notice assessing a penalty for underpayment of estimated tax I will verify the IRS calculation and attempt to eliminate or reduce it via First-Time Penalty Abatement or by using one of the exception methods available on Form 2210.  But I will never assess a client a tax penalty “upfront” - I leave it to the IRS.

If this situation applied to my own tax return I would never “self-assess” an underpayment penalty up front.  If the IRS wants to charge me a penalty let them do it and I will proceed from there.

My question –

Beginning with the 2014 Form 1040, am I legally, or ethically, required to assess my client a penalty for not having health insurance coverage?  Or can I, as I do with the penalty for underpayment of estimated tax, ignore the issue and leave it to the IRS to determine if a penalty is appropriate?  Will I face a potential preparer penalty if I ignore the issue?

I openly solicit the opinions of fellow tax bloggers and fellow tax preparers.



Teri said...

I solved the problem by selling my tax practice after 25 years I don't need to deal with this BS anymore. Too many changes put on the backs of tax preparers.

Chris Johnson, EA said...

Hi Bob,

Happy New Year! This health care issue and preparing returns will be an added hassle, perhaps a royal PITA on next year's filing season, I agree.

This requirement already existed for years on the Massachusetts state returns, and just like the federal returns, whether or not my client had health insurance had nothing to do with preparing the Massachusetts return. Fortunately, I only had one married couple that filed in that state, and they have since moved to another state so it isn't something I have to deal with on the upcoming filing season. I regarded it as a minor nuisance because it was only one client. But to have to do this with ALL my clients next year? UGH!!!!

---Chris Johnson, EA

Chris Johnson, EA said...


Perhaps someday I can sell mine and collect my "boat check" (wouldn't that be nice), but I have a ways to go until I hit the 25-year mark. Until then, I guess I have to put up with the BS...

But on the subject of selling a tax practice - how on earth does that work? Since most tax practice have few tangible assets, it seems like the only thing of any real value would be the client list, and I would imagine that clients would be pretty upset about my selling their personal information to someone else. Is that the type of thing that you reserve the right to do (sell their information), when signing any kind of engagement letter/services agreement?

Anthony said...

I don't think any final regulations or other word from the IRS/Treasury-Secretary have been released on this. Furthermore, the text of the law (IRC 5000A(g)(1) says "The penalty provided by this section shall be paid upon notice and demand by the Secretary").

The wording of this makes it sound like the the IRS is going to calculate the penalty for you. But where will they get the information? They need the income of every person getting an exemption on your return who is required to file a tax return. Will they get this information themselves, or do you have to report it? Regarding either answer, what if one of your dependents either 1) is required to file but doesn't; or 2) lies about his/her income? What if you're ready to file on February 1 but your dependent isn't ready until October 1?

There are a lot of unanswered questions.

As far as the estimated tax penalty, the Form 1040 instructions (2012 is the one I'm quoting from) says "Because Form 2210 is complicated, you can leave line 77 blank and the IRS will figure the penalty and send you a bill." Contrast this with something like the penalty for early withdrawal from a retirement account, which I assume the calculation of is not optional.

In any case, the only thing I think we can do right now is wait. If the IRS comes out with forms and doesn't say they're optional, you should probably consult with a lawyer before taking the position that you're going to ignore their rules. But maybe they're just going to require very minimal information with the return (who is covered and for which months), and then calculate the penalty themselves based on the returns which are filed.

Rita Strang said...

For those of us who are CPAs but we e-file for family and friends, does anyone know how this is going to appear on Turbotax?