The IRS has become the first line of enforcement of a provision in the Health Care Bill that requires everyone in the country to prove they have health insurance, either private or government sponsored, or face a stiff fine depending on their income level. Anybody with income less than 150% of the federal poverty level (typically $30,000 to $50,000 depending on how many kids you have.) is exempt from the provision. The problem is that the IRS can only snatch fines from tax refunds due. They are prohibited by statute from enforcing non tax liabilities or pursuing collections of such.
Of course the Massachusetts Department of Revenue does have such collection authorities, and there are fines already in place in the state that match the level of those in the federal bill. Therefore the fine you pay to Massachusetts is deductible on your federal return because it is part of your income tax liability.
Confused yet?
From USA Today:
By Sandra Block, USA TODAY
The IRS processed more than 230 million tax returns last year, paid 127 million refunds and received about 68 million phone calls. The agency is responsible for enforcing a tax code that, at 71,000 pages, makes Anna Karenina look like a comic book.
Starting in 2014, the agency will have another task: making sure all Americans have health insurance. Under the law, Americans who can afford health insurance but refuse to buy it will face a fine of up to $695 or 2.5% of their income, whichever is higher. More than 4 million Americans could be subject to penalties of up to $1,000 by 2016 if they fail to obtain health insurance, the Congressional Budget Office said last week.
The IRS will be the enforcer — sort of.
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While the IRS can impose liens or levies, seize property or seek jail time against people who don’t pay taxes, it’s barred from taking such actions against taxpayers who ignore the insurance mandate. In the arsenal instead: the ability to withhold refunds from taxpayers who decline to pay the penalty, IRS Commissioner Doug Shulman said this month.
Still, compliance with the health reform law will be largely voluntary, says Timothy Jost, a law professor at Washington and Lee University. “By taking criminal sanctions and liens and levies off the table, the IRS’ hands are tied, to a considerable extent.”
The IRS is “being put in a position where it will be sending notices that will annoy people” and not much else, says James Maule, professor of law at Villanova University and author of the tax blog MauledAgain. “It’s basically designed for failure.”
Shulman said he believes most Americans will comply with the law. The experience of Massachusetts, which has required residents to have health insurance since 2006, would appear to support that view. In 2008, 98% of state tax filers who were required to provide health insurance information with their state tax returns met that filing requirement, and 96% had coverage, according to a preliminary report issued in December by the Massachusetts Department of Revenue.
But Massachusetts’ health care law gives the Department of Revenue the authority to use its regular tax-collection powers to enforce the insurance mandate, says spokesman Robert Bliss. Through September 2009, the state had collected $12.9 million of the $16.4 million in penalties assessed in 2008.
‘A dangerous expansion of the IRS’ power’
In this political environment, even a defanged IRS stirs up powerful emotions. Among the concerns about the IRS’ role in the health care reform law:
•The law will lead to a dramatic expansion of the IRS. The Congressional Budget Office has estimated that the IRS will need an additional $5 billion to $10 billion over the next 10 years to administer the health care law. That projection has fired up activists who believe the IRS should be downsized, or abolished.
Some Republican lawmakers have extrapolated from that estimate that the IRS will need to hire an additional 16,500 agents to enforce the health insurance mandate. Rep. Dave Camp, R-Mich., ranking minority member of the House Ways and Means Committee, called the law “a dangerous expansion of the IRS’ power and reach into the lives of virtually every American.”
The CBO report refers to the $10 billion figure as “administrative costs” and makes no reference to the number of employees the agency will need to hire. And enforcement is only one part of the IRS’ responsibilities under the law. The agency will also be in charge of providing tax credits to small businesses, along with refundable tax credits to individuals who can’t afford health insurance.
“The IRS is going to need additional resources, but in terms of health reform, probably the main focus is going to be on processing” the credits, Jost says.
The IRS has already started some of its administrative tasks. Last week, it began mailing postcards to more than 4 million small businesses and tax-exempt groups with information about a provision in the law that provides tax credits for small businesses. The tax credit, which takes effect this year, is designed to encourage small businesses to offer health insurance to their employees or keep the coverage they already have.
•The law will make it more difficult for the IRS to carry out its primary job of collecting taxes. Only 64% of taxpayers who called the IRS during last year’s tax-filing season reached an IRS representative, according to a report by the IRS’ national taxpayer advocate. The IRS’ modest goal for this year was to answer 71% of taxpayer calls. Even more callers could have trouble getting through when the IRS takes on its obligations under the health care law, Sen. Charles Grassley, R-Iowa, said at an April 15 Senate Finance Committee hearing.
“Taxpayers trying to do the right thing regarding their tax responsibilities shouldn’t have to be put on hold — or have to call back — because the IRS is now answering questions about health insurance,” Grassley said.
The new responsibilities could also force the IRS to cut back on complex audits of sophisticated tax-avoidance schemes, such as illegal offshore accounts, Maule says. To handle the administrative tasks associated with the law, the IRS may need to divert experienced IRS agents who typically conduct these audits, he says. “This is going to make it easier for people who want to play the audit lottery game to get away with it.”
Another potential problem: Administering the health care law will strain the IRS’ already outdated computer and data-storage systems, says Pete Sepp, spokesman for the National Taxpayers Union, an advocacy group that supports lower taxes. “The IRS customer-service front end is already sagging, and the back end is not looking so hot, either,” he says.
•The IRS does a poor job of managing social programs. Critics of the legislation say problems with the Earned Income Tax Credit, a federal program that provides tax rebates to low-income working families, illustrate the pitfalls of putting the IRS in charge of administering health care reform. The EITC program “has one of the highest fraud and abuse rates of any tax provision out there,” Grassley said at the April 15 hearing. In tax year 2006, the latest year available, IRS made $10 billion to $12 billion in erroneous EITC payments, according to a study by the Treasury Department’s inspector general.
IRS officials argue that the two programs are vastly different. The health care subsidies will go directly to insurers, not taxpayers, giving individuals little incentive to cheat, says IRS spokesman Frank Keith.
Jost maintains that the tax credits could encourage compliance, because taxpayers who refuse to provide information about their health care coverage will be ineligible for federal health insurance subsidies. That subsidy “is going to be pretty significant for lower-income people,” he says.
Under the law, millions of middle- and low-income taxpayers will be eligible for subsidies to help pay for their health insurance. Taxpayers with incomes of up to four times the poverty level — currently $43,320 for an individual and $88,200 for a family of four — would qualify.
