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Reply to Question on IRS Penalties for Underestimation of Income     
Old 09-07-2017, 01:37 PM   #1
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Question on IRS Penalties for Underestimation of Income Question on IRS Penalties for Underestimation of Income
If someone receives a penalty on their tax return for underestimation of their income for the ACA tax credit, is this penalty something the IRS can collect? I know that the IRS does not actively try to collect penalties for not having insurance, but what about the penalty related to underestimation of income? I have clients that are asking me and I have called some CPA firms and not gotten clear answers. Appreciate hearing from any of you on this. Thanks!
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Old 09-07-2017, 02:05 PM   #2
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income
The IRS is NOT an organization to get crossways with. Unless you are licensed to practice tax cases with the IRS and prepared to defend your advice to your client with the IRS, I would suggest you NEVER advise someone not to pay a tax penalty because you do not think the IRS will try to collect it. As far as I would go would be to suggest having a professional tax preparer review the return and supporting data to see if the return was properly prepared.

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Old 09-07-2017, 02:26 PM   #3
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income Nikita is the thread starter for: Question on IRS Penalties for Underestimation of Income

Originally Posted by LostDollar View Post
The IRS is NOT an organization to get crossways with. Unless you are licensed to practice tax cases with the IRS and prepared to defend your advice to your client with the IRS, I would suggest you NEVER advise someone not to pay a tax penalty because you do not think the IRS will try to collect it. As far as I would go would be to suggest having a professional tax preparer review the return and supporting data to see if the return was properly prepared.
Thats fine but I would still like to know the answer to the question.
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Last edited by Nikita; 09-07-2017 at 02:27 PM. Reason: spelling
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Old 09-07-2017, 02:47 PM   #4
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income
Originally Posted by Nikita View Post
Thats fine but I would still like to know the answer to the question.
That's not a penalty, that's a recalculation of the subsidy based on the final income reported on the return. The IRS will undoubtedly collect that because it will be part of the tax computation.
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Old 09-07-2017, 02:47 PM   #5
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income
They can withhold the penalty from a refund, but if no refund is due, they don't have a defined mechanism to enforce collection.

The IRS does not forget, and they're happy to audit those who owe money to see if they owe more (and they're really good at finding ways you owe more...)

I always advise to follow the law to the letter and pay the proper taxes.

IMO, it's like running from a tiger, you're just going to be more tired when you're caught.
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Old 09-07-2017, 02:57 PM   #6
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income
I have had two people that went to a professional tax collector and owe $660 and $800, respectively and they paid the balance after the tax refund out of pocket. Sent it in just like you would if you do taxes and owe for any reason.

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Old 09-07-2017, 03:06 PM   #7
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income
Originally Posted by RayNY View Post
They can withhold the penalty from a refund, but if no refund is due, they don't have a defined mechanism to enforce collection.
Sure they do:

https://www.irs.gov/businesses/small...ection-actions
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Old 09-07-2017, 03:19 PM   #8
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income
Again, if the income doesn't match the subsidy application then the tax return will impute the difference between the APTC (it's called Advanced Premium Tax Credit for a reason) and the actual subsidy based on the final income.

While there are some limits as to what the IRS can collect (mostly for falling below the 100% FPL level) it's still a revision to the APTC, not a penalty.

Most of my clients don't understand this and I've given up trying to explain, I just tell them to ask their tax advisor.
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Old 09-07-2017, 03:48 PM   #9
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income
"You need to use the best answer you have as of this time. The application requires that you notify the marketplace if there is a change in your application, including income. When you file your taxes, a reconciliation will be completed and you will owe any subsidy money you should have not received, but the opposite is also true. If you were owed more money via the subsidy, that will be returned to you. Beyond that, I am not a CPA and can't even play one on TV. You need to contact your CPA."

THAT is the correct answer to the question. Don't game the system. One way or another, you are going to pay the correct amount.

And its not a penalty. Its an adjustment to the subsidy you should have/have not received. There's a difference.

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Old 09-07-2017, 05:18 PM   #10
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Question on IRS Penalties for Underestimation of Income Re: Question on IRS Penalties for Underestimation of Income
Here is where using the correct terminology will get you much further.
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