Tax or Penalty?

When you owe money to the IRS, does it matter whether it is a tax or a penalty?

That question was put to a bankruptcy court recently.  John Chesteen filed for bankruptcy in June 2017.  The IRS filed a proof of claim for $5,100 in taxes owed.  The Service later amended the claim to add $695 in “shared responsibility payment” because Chesteen had failed to have health insurance. 

Chesteen objected that the shared responsibility payment was a penalty, not a tax, and as such it was dischargeable in bankruptcy.  The relevant provision of the legislation uses the word “penalty” 18 times, and never uses the word “tax.”  The bankruptcy court agreed with the debtor.

IRS appealed that decision to a District Court, which has reversed the decision.  The Court “looked beyond the labels” to determine that the payment for failure to have health insurance, although intended to spur people to buy such insurance, really functions more as a tax than as a penalty, intended to raise revenue for the government.  “The shared responsibility payment is less than the price of insurance, will be collected through the normal means of taxation, and contains no negative consequences except for a payment to the IRS, which is allowed in the law.”

The bottom line for Mr. Chasteen is that the penalty for failing to have health insurance that he couldn’t afford because he was on the verge of bankruptcy will have to still be paid after the bankruptcy proceedings are complete.

Note that the shared responsibility payments expired on December 31, 2018.

At The Trust Company of Kansas, we help people. We promise to minimize the burden of wealth management and bestow the freedom to enjoy everything else. The officers at The Trust Company of Kansas are always willing to discuss your financial goals with you and help you to create a plan that is well-aligned with your wishes. If you have a specific question about tax or estate planning, please contact us at (800) 530-5254 or visit, and one of our Certified Trust and Financial Advisors will be happy to assist you.