Incorrect Tax Forms Cause Major Headaches for 800,000 Americans

One of the biggest changes facing tax filers this year is proving that they have health care coverage due to the requirements of the Affordable Care Act (AFA). Additionally, filers must also prove that their income qualifies them for subsidy payments, which they have already been receiving. Unfortunately, some serious errors by government officials have just made this process even harder. Over 800,000 filers in 37 states, who thought they were prepared to file, have been notified that the government sent them incorrect paperwork. Even worse, at least 50,000 people who have already filed their taxes using the wrong documentation will have to file amend returns once they receive the corrected form.

The Problem

1095 form errorThe error only affects individuals and families who obtained health care coverage through the federal exchange and received subsidies. Subsidies are granted by the government to help individuals under certain income limits pay for their health insurance premiums. The 2014 subsidies were based on the projected household income at the time of enrollment. The government recent mailed out 1095-A forms, which report the average benchmark premium in an individual’s area and the amount of subsidy that they qualified for. The premium amount is how the government determines the amount of premium tax credit filers are eligible to receive. A blog post on the website stated that the initial 1095-A forms contained 2015 premium benchmarks instead of the ones for 2014. Speaking on behalf of the Centers for Medicare and Medicaid Services, Andrew M. Slavitt said that they do not know how or why the mistake occurred. Officials estimate that individuals will receive a corrected Form 1095-A in the first week of March.

Unfortunately, it wasn’t just the federal health care exchange that had reporting issues. James F. Scullary, a spokesman for the California healthcare exchange, said that they were in the process of sending out over 100,000 corrected forms to households in that state.

The Impact

Affected households were notified via email and phone calls as soon as the error was detected. Filers can also login in to their accounts, where they will see a message indicating whether they were affected. Additionally, they can call the federal customer service center at 800-318-2596. The 50,000 tax filers who have already filed their income tax returns will receive special instructions from the Treasury Department as to how they can file amended returns.

These errors are particularly difficult for lower-income families who received subsidies for their heath care premiums. Many of these families rely on their annual tax refunds to pay critical household bills. Waiting to file taxes until a new form is mailed out places them in a tough financial position.

Healthcare Enrollment Extended

In related news, millions of households who are still uninsured are also getting surprises when they file their taxes. Steep penalties are subtracted from a household’s tax refund if they cannot prove that they had health insurance coverage for 2014. The penalty is $95 per adult or 1 percent of income. In 2015, the fees rise to $325 per adult or 2 percent of income. To help mitigate these penalties, President Obama announced a special enrollment period for healthcare that runs from March 15th to April 30th. This allows uninsured individuals to sign up for healthcare on and not have to pay penalties for 2015. These individuals are still responsible for paying the penalties for not having insurance during the 2014 year. Only taxpayers who live in states with a Federally-facilitated Marketplace (FFM) are eligible to take advantage of this special enrollment period.

Tom Brady Avoids Tax Penalty Associated with Giving Chevy to Malcolm Butler

When Chevrolet prepared to give a brand new 2015 Chevy Colorado to New England Patriots quarterback Tom Brady for being Super Bowl XLIX MVP, Brady did the honorable thing and said he would give it to cornerback Malcolm Butler instead. After all, it was Butler who intercepted a pass on the goal line to secure the Patriots' Super Bowl win. However, after considering the tax consequences of Brady giving away the vehicle himself, Chevy decided to give it directly to Butler instead, thus shifting the tax consequences to him.

Gift Tax PenaltyYou see, the IRS considers vehicles a taxable prize under the Internal Revenue Code, section 74. If Brady had received the vehicle and then given it to Butler, Brady would have had to pay $13,500 in income taxes just for receiving it (based on his 39.6 percent tax bracket). Brady would then have had to pay an additional $8,000 to cover the gift tax that the IRS charges when someone gives away items of value. The IRS allows individuals to give away money or property valued at $14,000 each year. If the item or monetary amount is higher than this and the giver must pay it. Now granted, money isn’t a problem for Tom Brady. Taxes in this case, however, would have been almost as much as a new vehicle. Since a new Chevy Colorado only costs $34,000, it begs the question of whether it’s worth it to go through the hassle of dealing with all of the IRS regulations related to gifting one. By giving the vehicle directly to Butler, the gift tax penalty was eliminated for Brady. Additionally, Butler is now the one who must pay income taxes on the vehicle.

It’s not the first time that this issue has arisen for Brady, a Super Bowl veteran. He also gave away the car he received for being the Super Bowl XXXVIII MVP to his high school, which raffled it off to raise money.

This story highlights the serious tax consequences that come with receiving a free gift, especially one valued at $35,000 like the Colorado in this story. While the average American won’t win a car, they do often give relatives property or money for down payments. This means that they are subject to the IRS’s gift tax and income tax regulations. However, there are ways to mitigate the tax implications of giving away high-value property or amounts. Those considering gifting large amounts should talk with a tax professional who can advise you on how to do it with the least amount of tax consequences.

Turbo Tax and Do-It-Yourself VS. Professional Tax Preparer

professional tax preparerTax time brings a multitude of financial decisions, including whether to hire a tax professional or prepare your own taxes using software like TurboTax. While the low cost and advertised ease of do-it-yourself tax products may be tempting, they aren’t always what they claim to be. In fact, many tax filers find them frustrating and time consuming with very little actual cost savings. These drawbacks and increased stress often makes hiring a professional tax preparer a smart move.

The Dangers of Do It Yourself Taxes

When people consider using do-it-yourself tax filing software, they typically focus on the positives, like the low cost and ability to use them from their couch. However, these programs have quite a few negatives as well, which could wind up causing an audit, late penalties and even interest charges. Here are a few problem areas:

  • They’re time consuming and stressful- Tax software promises to walk you through all the steps, but what happens when you don’t understand the steps? Online help systems and FAQs are often insufficient to help you understand what to enter. For example, health insurance premiums can be deducted in some instances but not all.
  • You can enter any numbers into the return – The ability to enter any number into the software may seem like a good idea, but it can be dangerous. A higher charitable contribution amount or inflated IRA may get you a bigger return, but it can also get you into serious trouble down the line.
  • You don’t know if you did it correctly – There are few tax topics that apply to everyone. Most only apply to some people in some cases. Many software programs don’t ask enough questions to find out if you are truly qualified for a deduction, for example mileage deduction for a vehicle.
  • There’s no continuity- Even if you use the same tax program every year, it can make errors. Most programs say that they import information from the previous year, but would you know if they didn’t? Most people don’t and end up losing deductions or credits that they qualify for.

Big Box Drawbacks

Some people know that they don’t have the skills or patience to do their own taxes. However, to save on costs they go to a big box tax service like H &R Block or Liberty Tax Service. While the price may be right for these services, there are some things you should know. Primarily, they use untrained staff to prepare taxes. Most of their preparers have only taken a four to six-week course in taxes. They aren’t even required to have previous experience in accounting and rely on software programs to do most of the work. That means they aren’t any more knowledgeable than you are. In addition, many of these stores close on April 17th, which means they aren’t around if you are audited by the IRS.

Benefits of Professional Tax Preparers

Professional tax preparers have years of knowledge, advanced degrees and certifications, such as Master’s Degrees and CPA and EA licenses. Their experience and education is what will ensure that their clients get all of the deductions and credits that they deserve.

Here are a few more advantages that these tax professionals can put to work for you:

  • They can often represent you if you are audited and help you handle collection matters.
  • They provide tax planning to help you make tax saving decisions early.
  • They spot opportunities to help you make smart tax decisions like converting ordinary income into capital gains.
  • Their office is open year-round to answer your questions

At Dukhon Tax, we understand taxes down to a theoretical and statutory level, which is much better for our clients! Visit our website for a free, no obligation consultation! We even offer a special package for students!