Yet Another Illegal ACA Tax Regulation

by Andy Grewal — Thursday, Oct. 8, 2015

I have previously written about various IRS regulations that contradict the clear language of tax code Section 36B. I recently re-examined the regulations and was only mildly surprised to find another provision that plainly exceeds the IRS’s rulemaking powers. Here, the IRS has simply discarded the statute’s joint return requirement for a segment of taxpayers (abused or abandoned spouses). Although one naturally pauses before criticizing the IRS for actually having a heart, the regulation presents an opportunity for tax avoidance and will lead to illegal penalty collections from employers.

Section 36B(c)(1)(C), titled “Married couples must file joint return,” requires that married persons, as defined in Section 7703, file jointly if they wish to claim the Section 36B premium tax credit. Absent a joint return, a married person will not qualify as an “applicable taxpayer” and thus cannot qualify for a premium tax credit. The statute’s operative language is perfectly clear on this point: “If the taxpayer is married . . . at the close of the taxable year, the taxpayer shall be treated as an applicable taxpayer only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.”

Congress often requires that married persons file jointly to obtain tax benefits, because separate filings potentially inflate the amount of claimed deductions or credits. (See Part III.C of this thoughtful article for further discussion.) Also, where the amount of a tax credit depends on a taxpayer’s household income (as under Section 36B) rather than individual income, it makes sense to require a joint tax return that shows a single household income, rather than multiple individual tax returns showing potentially arbitrary allocations of household income.

Joint return requirements may impose hardships, however. If a taxpayer has been abandoned by his or her spouse or suffers from an abusive relationship, joint filing may be difficult or unappealing. Joint returns require two signatures and establish joint liability, and if a spouse is missing or if a spouse is dangerous, filing a joint return may be impractical.

Various commentators have argued for reforming the tax code’s approach to joint return filing, and maybe Congress should amend or repeal the numerous tax code provisions that condition the enjoyment of a tax benefit on the filing of a joint return. When it comes to the ACA, however, the IRS has not bothered to respect the legislature’s clearly articulated policy decision. Under Treas. Reg. 1.36B-2T(b)(2)(ii), issued without following the APA’s required notice and comment procedures, the IRS has essentially thrown out the statute’s joint return requirement in some circumstances, granting tax credits to abandoned or abused spouses.

Putting legality aside, it’s hard to get too worked up over the extension of tax benefits to a class of highly sympathetic persons. The tax code’s current approach to filing statuses (including the joint status) seems somewhat antiquated, and I am open to a different regime. Nonetheless, for those us concerned with the rule of law and the separation of powers, the IRS’s actions here are troubling, especially in light of the various other instances that the IRS has rewritten Section 36B. Those instances, which I’ve previously detailed, improperly extend Section 36B credits to potentially several million persons in the Medicaid coverage gap, to some unlawful aliens, and to some persons who already receive employer-provided health coverage. The joint return regulation is simply one of several IRS rewrites of the ACA tax credit.

The IRS’s administrative implementation of the unlawful joint return regulation also raises concerns over tax evasion. To qualify for the relief created by the regulation, the taxpayer must simply check a small box on the top right of the Form 8962 (“Relief”). The instructions indicate that the taxpayer should not explain why it is avoiding the joint filing requirement: “Do not attach documentation of the abuse or abandonment to your tax return” (Page 3). It thus seems remarkably simple to cheat one’s way out of the Section 36(c)(1)(C) joint return requirement if, as is regrettably often the case, a taxpayer wishes to take shortcuts at tax time. The IRS’s approach here is especially surprising, given the great lengths that a spouse must go to establish tax relief in a different statutory context. See IRS Form 8857, relating to Section 6015 innocent spouse relief, which also often deals with sensitive issues related to abandonment and abuse.

The IRS’s rewrite sets the stage for some potentially difficult and uncomfortable controversies. When an employee receives a premium tax credit, that generally triggers or increases a shared responsibility payment (penalty) on the employer under Section 4980H. However, employers can challenge assessed penalties on the grounds that premium credits were unlawfully awarded to their employees. In these circumstances, the employer may have occasion to examine whether its employee’s claim of abandonment or abuse is bona fide. I tend to believe that such matters are none of an employer’s business, but the IRS regulation makes it so. Additionally, the employer can argue that Reg. 1.36B-2T(b)(2)(ii) is invalid, either because it violates the statute or because the IRS skipped notice-and-comment procedures in issuing it.

Sensitive issues raised by abandoned or abused spouses should be addressed by comprehensive legislation. The IRS’s politically expedient approach, under which it rewrites Section 36B without considering the consequences and under which it pits employers against their employees, is hardly admirable. Thumbing a nose at Congress rarely leads to a good result, even if some at the agency may believe they are “doing the right thing” as they unilaterally amend Section 36B.

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