The Internal Revenue Service is hiring thousands of agents as the agency prepares to become the primary enforcement mechanism for President Obama’s health care law. Although the IRS cannot come after taxpayers who fail to abide by the individual mandate alone, it can target them for additional investigation for other aspects of their return and threaten to withhold tax refunds.
The IRS will determine whether taxpayers have adequate health insurance coverage to satisfy the law’s mandates. Although the IRS may not use its full array of tools to enforce the law’s individual mandate, most taxpayers who run afoul of the penalties will have other tax liabilities, allowing the IRS to unleash its full arsenal against them based on that justification.
IRS Determines Liabilities
Although a few taxpayers could have a tax liability solely for insurance, most will have other liabilities as well, notes Ryan Ellis, tax policy director at Americans for Tax Reform.
“It would be very difficult [for the IRS] to fine-tune it to that level,” to limit enforcement strictly to the coverage mandate, Ellis said. “It would have to be a situation where somebody exactly paid their tax liability, except for the fine. I just don’t see that happening very much.”
The complexity of what the IRS does with tax dollars assigned under the law will be hidden from many Americans by their tax preparation software, Ellis notes.
“Let’s say you owed $1,000 [to the IRS], $800 of which is the fine,” Ellis said. “You send in a $500 check to the IRS, and it’s completely discretionary for them what bucket they’re going to assign that to—the $800 in fine, or the $200 in other tax liability you have. There are no ordering rules, in other words. If they had ordering rules in there that said any taxpayer payments of additional liability would first go toward tax liability then toward the fine liability, [that would clarify the matter,] but it doesn’t say that in the statute.”
More than 75 percent of taxpayers typically get tax refunds, which could be withheld to address this liability. Also, there’s no relief for those on repayment plans, either, Ellis says.
“Suppose a taxpayer gets on a repayment plan,” Ellis continued, “and promises to pay $300 a month. Because there are no ordering rules, the IRS is going to treat this as a unified liability. I don’t see how they do it otherwise.”
No Breaks Likely
Daniel J. Pilla, a taxpayers’ rights advocate and head of TaxHelpOnline.com, says the idea that the IRS can’t come after you for failing to pay the fine under the individual mandate is a myth.
“The IRS always goes after people with unpaid liabilities,” said Pilla. “I do not expect this to change [regarding] whether or not they have government-approved health insurance.”
Pilla says the individual mandate penalty will be pro-rated on a monthly basis by the IRS.
“There is a three-month exclusion for not having insurance,” Pilla explained. “Thus, if a person has no coverage for six months and the applicable penalty is $695, his penalty will be $173.75, which is one twelfth of $695, times 3, applying the three-month exclusion.”
Pilla notes the fines will increase dramatically in the future, making it likely that more individuals experience audits and closer examination of their returns to seek out what the IRS considers to be additional revenue.
Ellis said he expects tax returns to become more complex for everyone.
“It will be a pretty good amount of reporting,” Ellis said. “It would probably be about the same level of information reporting as, say, if you had a rental property. A home-based business would be a little more complicated. There will probably be only one form, but a lot of things on it.”
Ellis says there’s unlikely to be any way to avoid the additional paperwork. Even people with employer-based health insurance will have similar requirements.
“It’s at least going to generate a minimum of one additional form, if not a couple of forms, for everyone,” Ellis said. “They’re going to have to document it somehow. Everyone in America is going to receive some proof of insurance as a tax form from their health insurance company, be it Medicare, Veteran’s Affairs, Medicaid, employer-based coverage, or individual coverage. Some tax documentation proof of insurance form will come out in January, with all of the rest of their reporting forms.
“That’s going to have to go on every 1040 that’s filed. Every single one. I don’t know any way around that,” he added.
IRS Activities Shrouded
Pete Sepp, executive vice president of the National Taxpayers Union, says much of the IRS’s preparations have remained in the dark to this point, including the specific number of agents to be hired, which could be as high as 16,000.
“Many studies have been conducted on the potential effects of the 2010 health law on the economy, patients, and the federal budget, but few have examined the mechanics of how the tax agency would enforce many of the law's provisions,” Sepp said. “The news is not good, but it's vital that Americans get it, plan for it, and take action with their elected officials about it.”
Pilla says the increase of paperwork and power for the IRS is an unprecedented and unwise step.
“Responsible citizens never would have voted for this,” said Pilla, “nor would they have supported any politician who voted for it, if they had any idea of the extent to which the IRS would invade their private, most personal affairs under this law.”