The U.S. Court of Appeals for the D.C. Circuit recently ruled that $1.1 million in penalties that the Internal Revenue Service (IRS) assessed against a wireless phone company for failing to provide health insurance coverage for its employees in violation of the Affordable Care Act (ACA) is a tax. Therefore, the company could not challenge the penalty due to the Anti-Injunction Act, which prohibits lawsuits restraining tax collections. The case is Optimal Wireless LLC v. Internal Revenue Service et al., case number 22-5121, U.S. Court of Appeals for the D.C. Circuit.
Optimal Wireless LLC filed suit against the IRS in August 2020 after the agency assessed ACA penalties against it for failing to offer its employees affordable healthcare plans as required by the ACA in tax years 2016 and 2017. The company claimed the penalty was an “assessable payment” under IRC Section 4980H. Optimal also argued that the federal government violated the Administrative Procedure Act because the U.S. Department of Health and Human Services failed to certify Optimal as liable for the tax, which amounted to an “arbitrary and capricious” federal action.
A federal district court judge dismissed the suit in March 2022, saying the ACA penalty was a tax. As a result, the judge ruled Optimal could not challenge the tax under the Anti-Injunction Act.
On appeal in August 2022, Optimal asked the D.C. Circuit Court of Appeals to overturn the district court’s decision. The company argued that if the penalty was a tax, the IRS should have issued a notice of deficiency when it failed to pay the penalty, which it failed to do. A three-judge panel of the appellate court disagreed, finding that IRC Section 4980H explicitly refers to the ACA penalty as a “tax” no less than four times. Although the panel acknowledged that Congress also referred to the fine as a penalty in Section 4980, it stated that Congress could describe a fine as a penalty and treat it as a tax under the Anti-Injunction Act, as it did in this case.
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