If I owe income tax and the ACA penalty but don’t plan to pay the ACA penalty, will the IRS apply my payment to my penalty or to my income tax?

Q. If I owe income tax and the ACA penalty but don’t plan to pay the ACA penalty, will the IRS apply my payment to my penalty or to my income tax?

A: This question has been floating around in healthcare reform discussions for some time, and has been used as a fear-mongering tactic by ACA opponents. (See Michael Cannon, at the 14-minute mark in this video.)

The ACA forbids levies, liens, and criminal prosecution related to collection of the shared responsibility (individual mandate) penalty. But the concern was that if a person were to owe both income tax and the shared responsibility penalty and chose to not pay the penalty, the IRS might apply the filer’s payment to the penalty first, thus leaving a portion of income tax unpaid and subject to normal IRS collection proceedings.

I discussed this issue at length with an attorney from the IRS Chief Counsel’s office. In short, the fear mongering is unwarranted. If you owe income tax in addition to the individual mandate penalty and pay less than the total amount due, the IRS is going to apply your payment to your income tax first.

The attorney noted that this is due to the long-standing rule under which the IRS applies payments to the filer’s oldest debt first – in the case of the shared responsibility penalty, income tax is deemed to have accrued before the penalty.

But in future years, if you have an outstanding ACA penalty from a prior year, that would be considered your oldest tax debt, and it’s possible that an undesignated payment could be applied to a prior year’s ACA penalty. To be sure your payment is applied according to your wishes, you can simply tell the IRS that you want your payment to be applied to the current year’s income tax.

If unpaid, the individual mandate penalty debt stays with you, and the IRS will withhold it from a future year’s refund any time in the following ten years. It will accrue interest, but not late payment penalties the way unpaid taxes normally do, and it’s not subject to the other collections methods the IRS can use for normal tax debts.

H.R.1, the tax bill that Republican lawmakers passed in December 2017 will eventually repeal the individual mandate penalty, but not until 2019. Unless they’re eligible for an exemption from the penalty, people who were uninsured in 2017 will face a penalty when they file their taxes in early 2018 (and it’s no longer an option to leave the question about health insurance unanswered), and people who are uninsured in 2018 will be assessed a penalty when they file their 2018 returns in early 2019.

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