The IRS never was user friendly; the trouble is, it’s getting worse.
On Jan. 17, I received an IRS letter addressed to my mother dated Dec. 27. It demanded $4,900.88 from her and wanted a reply by Jan. 11. Of course, that was impossible. So things started badly.
The letter concerned my 100 year old mother’s 2018 tax return. During 2018 her youngest son (and my brother) was living with her in Mexico and being treated for a brain tumor. He had no income, had three brain operations in 2018 and died on November 6, 2018. His medical insurance had been purchased through a federal Marketplace, which unbeknownst to us made some payments to the insurance company on his behalf. However, because his doctors and other providers were in Mexico, he received no benefits from the insurance and his (and my) mother spent over $117,000 for his treatments. She also paid him the money for his insurance premiums. His insurer (Blue Cross) refused to pay anything for Mexican healthcare. Our mother died on November 11, 2019.
Naturally, in doing her 2018 tax return, we claimed my brother as her dependent and wrote off her income against the $117,000 in medical payments. Her actual income was about half of the medical payments, so she had to pay the rest from her savings. However, the insurance company never sent her a Form 1095-A to report what the government payments to it were, and they sent my brother’s copy to his old address in Chicago. Therefore, she was not aware that, since he was her dependent, she was liable for a tax called the Excess Advanced Premium Tax Credit Repayment. The first time she received any information about tax issues involving his medical coverage was in an IRS Audit Notice dated August 12, 2019. No Form 1095-A was ever received from the IRS.
I was eventually able to get a copy of the Form 1095-A when I called the insurance company. I responded to the Audit Notice on August 17, 2019.
The December 27 letter said that her Excess Advanced Premium Tax Credit Repayment was $7,425. The IRS accused her of failing to report it on a Form 8962 and not include this with her return. How could she have done this when she never received a Form 1095-A and my brother was dead when we calculated her taxes? By the way, she never paid any of the insurance premiums directly. She gave money to my brother when he asked for it, and he paid the insurance premiums himself. She did not question what any money she gave him was for.
Under the tax law, if the government pays money towards your Marketplace insurance fees (or those of a dependent), and if at the end of the year more premium tax credit in advance has been taken than what’s due from the government based on your final income, you have to pay back the excess when you file your federal tax return.
Unfortunately for my mother, her income was just high enough so that she would have to pay back practically the entire $7,425. The IRS demand letter contained hardly any information about who or where to call to discuss it. There was one phone number, but it turned out to be a fax number. I started by writing a letter and faxing it, and then I spent another five hours on the telephone trying to locate someone I could talk to.
I was finally about to speak with a Mr. Brandon, and he explained that our only choice was to pay the money which the IRS demanded or to amend my mother’s return and not claim my brother as a dependent. I did the calculation and found that amending her return without claiming him as a dependent meant that she would not be able to claim the $117,000 in deductions but she would also not have to pay the $7,425. I therefore prepared a Form 1040X amendment (as Mr. Brandon suggested). The final tax owed was $5,869.00.
The law as written may make some sense when the dependent involved is a young child, since the family is used to dealing with expenses for the child. But when the “dependent” is 62 years, and the parent is paying twice as much as her annual income for his medical expenses, plus insurance, it seems harsh to make her repay what the government paid on top of it.
Overall, it’s outrageous that the IRS can try to charge her $7,426 for payments made to Blue Cross when Blue Cross pays nothing on the insurance policy because all of the covered treatment takes place in Mexico rather than the U.S. Blue Cross can do this because Marketplace policies do not have to provide coverage outside the U.S. Under the circumstances, Blue Cross should repay the premiums to the government and to her estate if all of the client’s treatment is outside the U.S.
The rules of Medicare and Marketplace policies is that only U.S. treatment is covered. This makes little sense, since treatment outside the U.S. is usually cheaper than inside the U.S. These rules make medical life difficult for ex pats who live in foreign countries and have U.S. policies.