Form 1095-A Shared Policy Allocation Loophole

[TCl123]

I have a new client who’s previous accounting firm had allowed them a Shared Policy Allocation of 0% to Parents and 100% to the Nondependent Child:

2022 details:

• Covered Individuals:  Parents & 2 Children (1 is a dependent and 1 nondependent)
• 1095-A issued to Parents
• Parents household income is above the 400% federal poverty line
• Parent would have had a large Excess Advance Premium Tax Credit Repayment due on their tax return if 100% was allocated to them; however, the preparer allocated 100% to the nondependent child and 0% to the parents. This created a PTC Credit on the nondependent tax return and ultimately a refund.

If I am reading the Instructions properly, it states that if both filers agree to a specific allocation, that is acceptable.  The scenario above just seems too good to be true.  A possible red flag?  I am trying to determine if this is legal.

I really appreciate anyone's advice or suggestions on this.  Thank you so much!

[PhoebeRoberts]

Totally legit. Same as unmarried parents who live together can choose who claims the kid as a dependent. 

[TCl123]

Thank you, PhoebeRoberts!

[rbynaker]

I agree, legit under the tax law as written.  A counter-argument might be that on the Marketplace application the taxpayer misrepresented that the non-dependent was part of the "tax family".  But nobody has a crystal ball, they may very well have expected the non-dependent to be a dependent when they filled out the application at the end of the prior year so for there to be fraud the government would have to prove intent.  Best I can tell though, everyone sticks their head in the sand and just lets these go.

Rick

[TaxGuyBill]

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@rbynaker wrote:

they may very well have expected the non-dependent to be a dependent when they filled out the application at the end of the prior year

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I don't have any first-hand experience, but in the past I've been told some Marketplaces don't ask the proper questions to ask if the person will be a non-dependent and/or put everything on one 1095-A even if you say the person will be a non-dependent.

The other weird gray-ish area is when the non-dependent's income is under 100% of the FPL.  The rules say that a taxpayer still qualifies for the credit if the Marketplace gave Advance credit by determining the taxpayer would qualify ... but it the Marketplace didn't really determine that the non-dependent would qualify.

[TCl123]

Thank you all so much for your help with this!  I really appreciate it!

[TCl123]

When completing the tax return applying 100% to child and 0% to parent; Proconnect is issuing a critical error and therefore requiring the tax return to be paper filed.  (Guessing that it has something to do with the software not pulling the monthly Enrollment Premiums, SLCSP, and Advance Payment of PTC through to Form 8962).  Does that make sense? 

[TaxGuyBill]

Yes, a 0% may have an error.

In order to e-file, you may need to attach a PDF of the 0% 8962 and call the attachment "ACA Explanation".

[TCl123]

What would be the best way to do this?  Complete Form 8962 and save to a PDF to attach to the return and then remove the 8962 information from the Tax Return as if it did not exist?

Would you recommend doing this to allow the e-file of the return or just paper filing the return?

[TaxGuyBill]

If there is no way to get it to e-file with the existing 8962, yes, I would attach the PDF and delete it in the program.

I would try as hard as possible to e-file.  Paper-filing is prone to many more problems.

[TCl123]

Thank you SO much, TaxGuyBill!

I contacted ProConnect Tax Software and it looks like the only work arounds would be to attach the PDF or paper file it. The really weird part is that ProConnect DOES populate the Form 8962; however, it produces a critical diagnostic error stating that the software CANNOT e-file it.  So weird!  Well, the good thing is that it looks like I can print it down to a PDF and ultimately attach it.  

[TCl123]

I am not sure if I did something wrong ... 

I received a letter from the IRS asking for me to forward a copy of Forms 1095-A in regards to this tax return.  it says "the amounts you reported on Form 8962, PTC, Part II, columns (a) - enrollment premiums, (b) - applicable second lowest cost silver plan (SLCSP) premium, or (f) - advance payment of PTC, don't match the information we have on file from the Health Insurance Marketplace.  Send us a copy of your Forms 1095-A, Health Insurance Marketplace Statement, to support the amounts you reported on Form 8962.  If applicable, also send us a newly completed Form 8962." 

Does this make sense?  Is it possible that I did not do this correctly? 

Parents Return:

• I completed Part II, line 9 ... YES.  No amounts in 11-26 other than zero in 24 and 26.
• I completed the Form 8962 for the Parents Part IV Allocation of Policy Amounts with Child SSN & 0% in columns A, F and G.

Childs Return:

• I completed Part II, line 9 ... YES.  Amounts (agreeing to 1095-A) in 12-23.  Amounts in 24-26.
• I completed the Form 8962 for the Child Part IV Allocation of Policy Amounts with Parents SSN & 100% in columns A, F and G.

I attached the 8962 to the Parent's tax return with ACA Explanation when filing the 2023 Form 1040.

Thank you so much for any suggestions.  I really appreciate it!

[TaxGuyBill]

Nobody at the IRS looks at attachments to an e-filed return, so just send the 8962 in response to the notice.  Personally, I would also highlight the allocation section and write an explanation that it was allocated.

[TCl123]

Thank you so much, TaxGuyBill!  I really appreciate your help with this!  🙂