IMPLEMENTING NATIONAL HEALTH CARE
Taxpayers and IRS to be Challenged as Never Before
Executive Director, Tax Freedom Institute
Unless there is a substantial change in leadership in Washington in the next election, the Patient Protection and Affordable Care Act (PPACA) will go into effect as planned. The reason is the Supreme Court upheld the Act as constitutional in the case of National Federation of Independent Business v. Sebelius, Sup. Ct. Docket Nos. 11-393 and 11-400, June 28, 2012. Through its decision, the Supreme Court paved the way for the national health care program to roll ahead.
The IRS is just one of several federal agencies responsible for implementing the legislation. Specifically, the IRS is responsible for the enforcement and administration of forty-seven of the Act’s tax-related provisions. This Special Report addresses the role that the IRS will play in enforcing and administering the PPACA. My focus here is solely on the question of how the IRS can be expected to play an ever-growing role in your life and in the day-to-day affairs of every business in the nation as the tentacles of the PPACA wrap themselves around the most important and personal elements of your private life.
The IRS and Social Programs
The Patient Protection and Affordable Care Act is the most sweeping social legislation ever enacted in the United States. Even the Social Security program, the federal government’s first major step into the area of social planning and the beginning of the federal “nanny state,” did not and still does not have the incredible reach of the PPACA.
The major difference between the two programs is that while the Social Security tax is certainly not voluntary, participation in the Social Security program is. No citizen faces any penalty for not applying for or drawing Social Security benefits. On the other hand, failure to purchase the required medical insurance for yourself and dependents under the PPACA carries substantial civil penalties.
This marks the first time in the history of the United States that the federal government has commanded citizens to purchase a product or service under penalty of law. The monetary penalty imposed for failure to buy insurance is described as a “shared responsibility payment.” Code section 5000A(b)(1). In upholding this element of the PPACA, the Supreme Court ruled that the “shared responsibility payment” is in fact a tax, which Congress has the full authority to impose under Article 1, Section 8 of the Constitution.
The net effect is that unless Congress repeals the PPACA soon, the force of this legislation will change the face of America in ways that we now can only imagine. My intent with this Special Report is not to re-litigate National Federation or second-guess the Supreme Court’s decision. My intention is to explore the one thing that social policy-makers never seem to address when passing legislation of this magnitude—and that is the impact that it has on private citizens and businesses, apart from the simple economics of the penalty.
In the case of the PPACA, that impact involves a massive expansion of the power and reach of the Internal Revenue Service, the agency chiefly responsible to enforce and administer the PPACA.
One of the key reasons the IRS has grown so large and powerful over the past several decades is that Congress continues to hand the IRS the duties of administering social programs. Now, under the PPACA, the IRS is responsible for the largest social benefit program ever implemented in the history of the nation. To do this job, the IRS estimates it will spend nearly $1 billion just through 2013 in information technology costs alone. Estimates are that it will take a minimum of 5,000 and perhaps as many of 16,000 additional IRS employees to carry out the mandates under the law.
And this is just the beginning. There is no telling what the true costs will be as this program shapes up over the years.
The Act’s Key Tax-related Provisions
Although the Patient Protection and Affordable Care Act contains forty-seven tax-related provisions, just four of them promise to impose tremendous administrative burdens for the IRS and compliance nightmares for both individuals and businesses. When combined with the other forty-three, there is no telling what kind of costs the agency will incur in carrying out this massive legislation.
The four provisions in question are discussed below.
1. The Small Business Tax Credit. Since 2010, a tax credit has been available to eligible for-profit and tax-exempt “small employers” that pay at least half the cost of a single coverage (versus family coverage) health plan for their employees. A small employer is one with less than twenty-five full-time employees. The credit is based on the number of full-time employees and their average annual wages. The credit is targeted at small businesses and tax-exempt organizations employing low and moderate-income workers. Code section 45R.
There is a phase-in provision that reduces the credit as the number of employees increases. The full credit is available to employers with less than ten full-time employees and less than $25,000 in average annual wages. Employers with twenty-five employees or whose average annual wages are $50,000 or more get no credit. Code section 45R(c).
2. The Premium Tax Credit. Beginning in 2014, the Act creates a “refundable tax credit” payable to individuals for the purchase of health insurance under a qualified health plan. A refundable credit is one where you can get more money back from the government than you actually paid in taxes. An example is the Earned Income Tax Credit.
The premium tax credit is available to eligible individuals and families with incomes below a specified threshold (subject to income phase-outs). This is the chief means by which the federal government will subsidize the purchase of health insurance for targeted individuals. The insurance must be purchased through an “exchange.” Under the PPACA, the states are required to create insurance “exchanges” through which consumers not subject to an employer-provided plan may purchase health insurance. If a state does not set up an exchange, the Act allows the federal government to create one within that state. States may also join together to create regional exchanges. The exchange must be either a government agency or a non-profit entity. Code section 36B.
3. The Individual Responsibility Requirement. Beginning in 2014, individuals will be required to purchase and maintain “minimal essential health care coverage” for themselves and their dependents. The definition of “minimal essential coverage” is set by statute and therefore is subject to congressional whim. See code section 5000A(f). Failure to purchase such care will subject the individual to an annual penalty, which the statute refers to as a “shared responsibility payment.” Code section 5000A(b).
This has often been referred to as the “individual mandate” in that Congress has mandated that individual citizens purchase an insurance product that meets federal guidelines. Such a mandate is unprecedented in American law. There is no other example in U.S. history where the government required a person, as a matter of law, to purchase a specific product or service or risk civil penalties.
The penalty is equal to the greater of:
- $695 per person per year, up to a maximum of $2,085 per family, or
- 2.5 percent of “household income.” Code section 5000A(c).
The percentage amount is actually phased-in over three years. Beginning in 2014, the percentage is 1 percent. Beginning in 2015, the percentage is 2 percent. For years after 2015, the percentage jumps to 2.5 percent. The gross applicable penalty is pro rated to apply on a monthly basis “for any month during which any failure” to have adequate coverage exists. Code section 5000A(c)(2). The penalty amount must be computed by the taxpayer and reported on his tax return.
The law makes several exceptions to the individual mandate. They are:
- Members of a recognized religious group who have historically been exempt from Social Security taxes under code section 1402(g)(1), or those who are involved in a “health care sharing ministry,”
- Persons who are not lawfully present in the United States, and
- Persons who are incarcerated. Code section 5000A(d).
Section 5000A also provides exemptions from the “shared responsibility” penalty under the following circumstances:
- Persons with a hardship waiver,
- Those who cannot afford coverage,
- Those with income below the tax return filing requirement,
- Members of an Indian tribe, and
- Those who are not covered for a period of less than three months. Code section 5000A(e).
4. The Employer Requirement. Also beginning in 2014, employers with fifty or more full-time employees that do not offer “minimum essential health insurance coverage” to all of its employees “and their dependents,” or offer unaffordable coverage, will be liable for a penalty. The penalty applies if even just “one full-time employee” qualifies for a subsidy to purchase insurance through an exchange. The penalty is referred to as the employers’ “shared contribution” to national health insurance. Code section 4980H(a).
The penalty for failure to provide minimum essential health care as defined by Congress is calculated in two ways. The first applies to employers who offer no insurance their employees. In that case, a maximum of $2,000 per employee per year (reduced by thirty employees) is assessed against the employer. Code section 4980H(a). Thus, the penalty is not tied to the number of employees who are eligible to purchase coverage from an exchange. If even one employee is eligible to purchase coverage from an exchange, the maximum penalty applies to all employees (reduced by thirty). For example, a company with fifty employees could face a penalty of $40,000, which is $2,000 per employee, for a total of twenty employees (total workforce of fifty “reduced by thirty”). Code section 4980H(c)(2).
The second calculation applies in cases where the insurance offered by the employer is such that the employee nevertheless qualifies to purchase insurance from an exchange. In that case, the penalty is $3,000 per employee who qualifies to purchase insurance from an exchange. Thus, if the employer has fifty employees but only five of them qualify to purchase insurance from an exchange, the maximum penalty is $15,000 (5 x 3,000). Code section 4980H(b).
The penalty is “assessable” in the same manner as all other employment tax penalties under the tax code. In that sense, the IRS does not have to offer the employer an opportunity to review and contest the determination prior to assessing the penalty. The IRS may assess the penalty and provide a notice and demand for payment to the employer. Any appeals that may exist come into play only after assessment and collection begins. Code section 4980H(d).
IRS – The Face of National Health Care
The IRS will be the face of American national health care. The reason is that both the benefits and penalties to individuals and businesses for purchasing (or not purchasing) the health insurance required under the law take the form of either tax credits or tax penalties. It is also true that forms and declarations will have to be filed with the IRS to take advantage of the credits and to avoid the penalties.
But in most cases, the IRS will not be the decision-maker as to whether a person qualifies for a given credit, or owes additional taxes or penalties due to being disqualified to a certain extent. The IRS will merely be the messenger of that news, and naturally, the collector when it is determined that taxes and penalties are owed.
This is going to require the IRS to undertake a massive education program, including the preparation and distribution of publications and instructions to guide individuals and businesses in complying with this law. The IRS must also be prepared to answer millions of questions through phone calls and at its walk-in sites to guide people through the compliance maze. And when there is a discrepancy or people disagree with how the law is being administered, they will have to deal with the IRS to resolve the problem. The National Taxpayer Advocate (NTA) discusses the potential problems for citizens given this fact:
In most instances, the IRS is being asked to be the collection face of this provision [the individual mandate], but not the decision maker. This puts the IRS, and its employees, in the awkward position of collecting a penalty and potentially being unable to work with taxpayers who claim they don’t owe it. National Taxpayer Advocate, 2010 Annual Report to Congress, December 31, 2010, Vol. 2, page 28.
Even beyond that, I am concerned about the IRS’s capacity to manage this massive legislation. For the past several years, the National Taxpayer Advocate has been sounding the alarm about the IRS reducing the percentage of its budget that’s dedicated to taxpayer service. In the National Taxpayer Advocate’s 2011 Annual Report to Congress identifying the twenty most serious problems faced by taxpayers, she cites this lack of attention to taxpayer-service as the number one most serious problem citizens face. As the number of tax delinquencies has grown over the period of our national financial problems, more of the IRS’s attention and budget has been focused on enforcement and less on assistance.
Moreover, the NTA points out that as the IRS’s responsibilities are “expanded into other areas, it will turn to more automation and less interaction with taxpayers” in an effort to get the job done. National Taxpayer Advocate, Fiscal Year 2012 Objectives, Report to Congress, June 30, 2011, page ix. She points out that as this happens, the IRS will resort to:
- More rule-based decisions “without any personal contact,”
- More pressure to use summary assessment procedures “or truncated audit processes,”
- Greater use of automated correspondence “with no outbound calls to taxpayers,” and
- More “decision-making tools” which “supplant the individual employee’s determination” on the facts of a given case. Ibid.
From 2009 to 2013, the IRS’s budget went from $11.931 billion to $13.354 billion. Of these totals, the components of enforcement and taxpayer services break down as follows:
Year Enforcement* Taxpayer Services
2009 $5.117 $2.293
2013 $5.702 $2.253
* Amounts in billions.
Source: GAO, INTERNAL REVENUE SERVICE-Interim Results of 2012 Tax Filing Season, GAO-12-566, March 2012, page 18.
Already we are seeing the impact of this reduction on the IRS’s ability to help people. The Government Accountability Office (GAO) reports that during the 2012 filing season, the “IRS experienced a substantial increase in total call volume and a reduction in the IRS’s level of service resulted in wait times of about 17 minutes.” Ibid, GAO-12-566, March 2012, page 6.
Wait times are just part of the story. The IRS’s delivery of phone services dropped considerably over the past several years. For example, in 2007, 82.1 percent of calls to the IRS were answered. Regardless of any wait time, taxpayers got help. By 2011, the number dropped to 70.1 percent. Even worse, the IRS anticipates that by the end of 2012, the number will be 61 percent. Ibid, GAO-12-566, March 2012, page 23.
The bottom line, according to the NTA, is the IRS “has fallen short of providing adequate taxpayer service in important areas.” NTA statement: IR-2012-83, July 7, 2010. This will only get worse under the PPACA. Given the massive scope of the law, the challenges for the IRS and citizens are simply daunting.
Administrative and Compliance Challenges Facing Taxpayers and the IRS
Individuals, businesses and the IRS alike face many monumental new challenges in complying with and administering the PPACA. The following is a discussion of just a handful of the issues that could likely bring the system to its knees.
1. Establishment of a new definition of income. The current tax code is a monster for a number of reasons, but key among them is the fact that there are two different definitions of “income” under the law. Very generally, we have the definition of “ordinary income” for the purposes of determining one’s tax liability under the graduated income tax system. The second definition of “income” is that which applies to our secondary tax system (of which most people are entirely unaware until they are clobbered by it somehow) known as the Alternative Minimum Tax.
Because there are two different definitions of income, taxpayers must calculate their potential tax liability under both systems. The rules of deductions, credits, exemptions, etc., apply differently under each system. If a taxpayer calculates his ordinary income tax liability at X dollars but the Alternative Minimum Tax calculation shows that he owes more, the Alternative Minimum Tax applies.
The PPACA establishes a new definition of income—a third definition—which applies to many of the Act’s tax provisions, including the premium tax credit under code section 36B. That definition is “household income.” Household income includes not only the income of the family principals (say, husband and wife), but also the income of all other members of the “household” who live with the family principals. This is not limited to children. Any person who qualifies as a dependent under code section 151 is included in household income. Therefore, household income might include the income of a mother-in-law or a grandchild.
Under current law, there is no requirement to report household income to the IRS. Thus, there are no rules for figuring it and no mechanism for reporting it. The IRS has no means to collect the information or apply it. And citizens have no experience in calculating it. That means substantial changes will have to be made to tax forms and instructions and the IRS will have to reprogram its systems to accept, store, retrieve and utilize the information. Moreover, citizens and tax pros alike will have to be educated as to how, when and where to report the information.
2. Verifying household income reported to the “exchanges.” The premium credit is available to persons who pay insurance premiums to an exchange. The exchange, not the IRS, determines who is eligible for the credit and the amount of the credit. Thus, under the PPACA, citizens have to apply for coverage and in doing so, report to their respective exchanges their family size and household income. They will have to provide copies of their tax returns and whatever other additional information the exchange requires. The exchange verifies the information with the IRS and then informs the individual whether and to what extent he qualifies for the credit.
The IRS must verify household income and family size. But these things change on an ongoing basis. The information provided to the IRS on your tax return for one year (which reported facts relevant to the previous year) are not necessarily accurate as of the date the individual applies for coverage through an exchange. And what happens when a person’s circumstance change throughout the course of the year? He files his tax return only once per year, and at that, after the year has ended.
A person is required to report any changes to the exchange during the year as they happen and a reconciliation process occurs at the end of the year when the individual files his tax return. He may owe more or less money to the IRS, depending upon a lesser or greater premium tax credit. Thus, if a citizen received too large a credit, he might owe the IRS a substantial amount of money and the IRS will look for payment.
This process requires the creation of its own set of rules, procedures, forms and instructions. This is because the IRS’s capacity to “recapture” an overpaid credit is limited by law. The ability to collect is limited based upon a citizen’s “household income” if it is below 500 percent of the federal poverty level (FPL). Individuals below 200 percent FPL will have their overpayment recapture capped at $600. The cap increases as the percentage of FPL to family income increases, until it reaches $3,500 for individuals between 450 to 500 percent FPL. Citizens with household income above 500 percent of FPL are responsible to repay the entire overpaid credit. Code section 36B(2)(f).
If the history of the IRS teaches us anything, it is that there will be discrepancies between what a person reports to the exchange and what the IRS reports to the exchange through the verification process. With nearly 2 billion information returns filed annually reporting wages, interest, dividends, rents, royalties, etc., there are already substantial errors in processing these returns. When these errors occur, they lead to automated tax bills from the IRS. There is an appeals process the citizen may follow to challenge the IRS’s determination. Will that process apply to the exchange verification process or will an entirely new system have to be established?
A bigger question is whether citizens will be bounced from agency to agency in an effort to resolve the issue? As stated above, the IRS administers much the PPACA, but they don’t make most of the decisions under PPACA, and the IRS does not make the decision as to who is entitled to the premium credit and the amount. The IRS is simply the messenger. The decision is made by the exchanges. The NTA is already concerned that this will create a substantial problem for both the IRS and citizens.
In light of that, citizens most certainly will have to learn to deal with yet another government agency to resolve these issues. And with the trend toward automation discussed by the NTA, citizens will likely end up talking with computers about their health insurance issues to an even greater extent than we currently talk with IRS computers about tax problems.
3. Interaction with private insurance companies. At present, the IRS has nothing to do with the internal affairs of any medical insurance provider in the United States. This will change radically under the PPACA.
Under the Act, citizens can retain their private insurance plans if they provide “minimal essential health care coverage” as defined by law. The IRS must verify that citizens carry such coverage or impose the penalty for not having such coverage. Therefore, the IRS must proactively engage in collecting data from private insurance companies—something never before done. As to individual policies, at a minimum, the IRS will have to ascertain:
- The costs and benefits under the policy,
- Who’s covered under the plan and the periods of coverage,
- The household income reported to the insurance company, and
- Whether the individual was offered insurance by his employer.
The inquiry goes on. If the individual was offered insurance by his employer, the IRS will then have to know:
- How many employees the company has,
- The costs and benefits of the employer-offered policy,
- Who’s covered under that plan, and
- The period of coverage.
The IRS will have to develop new forms, instructions and filing procedures for obtaining all of this information. It will also have to develop systems for sorting, storing, assimilating and applying the information to a particular taxpayer and his family. And one must certainly ask the question, as I did early in this discussion, where does a citizen go when there is a discrepancy in the information reported to the IRS by the insurance company? What will be the level of run-around one is forced to deal with and where will the appeals process lie?
4. Deeper interaction with businesses. Even though the IRS has interacted with businesses in the past, the PPACA will require the IRS to dig much deeper into the affairs of businesses than it ever has before. For example, the Small Business Tax Credit discussed above is not based upon the total wages paid during the year, which is a simple number that could be lifted off the employment tax returns businesses already file. Rather, the credit is based upon the number of full-time employees and their average annual wages. The IRS does not currently collect this information.
Since the credit went into effect in 2010, the IRS had to create new tax forms and revise existing forms. The IRS also mailed out millions of postcards to businesses discussing the credit and added substantial new information on its web site. New tax credits (indeed any new provision of this substance) always create administrative problems. For example, the Earned Income Credit, the First Time Homebuyer Credit and the Making Work Pay Credit have been driving the IRS crazy for years. And one of the largest single areas of fraud the IRS battles year in and year out is with the Earned Income Tax Credit.
Compliance with the Small Business Tax Credit promises to create at least as much confusion for businesses and problems for the IRS as any of the other major tax credits, maybe more. There appear to be five steps an employer must follow to determine eligibility for the credit. They are:
1. Determine which employees to take in account,
2. Determine the number of hours of service those employees perform,
3. Calculate the number of “full-time equivalents,” which may be different from mere full-time employees,
4. Determine the average annual wages paid per full-time equivalent, and
5. Determine the premiums paid that are taken into account for purposes of the credit. See IRS Notice 2010-44 for details and requirements of the credit.
The complexity of the calculations necessary to determine eligibility for the credit constitute a recipe for error and the dollars involved create the potential for fraud. And according to the GAO, in 2011, the IRS had 12,000 employees working just on administering the health care tax credits. Keep in mind that the premium credit has not even gone into affect yet. See: GAO, INTERNAL REVENUE SERVICE-Interim Results of 2012 Tax Filing Season, GAO-12-566, March 2012.
But it doesn’t stop there. The IRS must administer the penalty applicable to employers with more than fifty employees who do not provide adequate health insurance to their workers. To enforce this, at a minimum, the IRS will need to know:
- The number of employees and their dependents,
- The number of full time employees and their dependents,
- The nature, scope and cost of the insurance offered to the employees,
- The periods of time that insurance is in effect, and
- Whether one or more employee qualified for coverage through and exchange.
Procedures and regulations will have to be established to create an appeals process for dealing with the employer penalty.
5. Interactions with more government agencies. Carrying out the legislative scheme set forth in the PPACA will require the IRS to deal with more government agencies than it ever has in the past. For example, the premium tax credit carries a number of eligibility requirements. Among them are the citizen’s family size and household income. This will have to be verified to the exchanges as discussed above.
However, the Department of Health and Human Services and the Department of Homeland Security are also involved. Health and Human Services must verify the information the IRS has on family size and income. Homeland security must verify a person’s immigration status.
And finally, the Social Security Administration must verify one’s citizenship.
What kind of checks, balances and appeal procedures will be in place to deal with the potential for discrepancies in the rivers of information flowing between these agencies?
6. Privacy issues. Code section 6103 provides that a person’s tax return and “return information” must be kept confidential by the IRS. There are numerous exceptions to this general rule. As you might imagine, one body of exceptions allows disclosures to the exchanges set up under the PPACA, as well as others with a need to know your tax information in order to carry out the provisions of the PPACA. Code section 6013(j)(21).
Given the sheer scope of the information needed to enforce and administer the Act, I believe I can say that your privacy is a thing of the past.
7. Procedural transparency. The Freedom of Information Act requires the IRS to disclose all of its “instructions to staff that affect a member of the public,” unless a specific exemption applies. See 5 U.S.C. section 552. In its 2011 Annual Report to Congress on the twenty most serious problems people have with the IRS, the Taxpayer Advocate declared that the IRS’s “failure to disclose its procedures” is the twentieth most serious problem that people face. See NTA Annual Report to Congress, December 31, 2011, Vol. 1, page 380.
The fallout created by this failure includes:
- Depriving taxpayers and their representatives of the information they need to “prevent or resolve tax problems,”
- Uncertainty as to whether taxpayers “can rely on information from IRS employees,”
- Increased risk that the IRS “will be perceived as acting arbitrarily and inconsistently,” and
- Depriving the IRS of input from outsiders “that could improve its procedures.” Ibid.
The NTA cites a number of reasons why the IRS does not properly disclose its procedures. Chief among them is the massive volume of guidance material the IRS produces. For example, as of the end of 2010, the Internal Revenue Manual contained 1,923 sections that were written by approximately 646 different authors. The writings and determinations made by these individuals “were subject to little oversight.” Ibid, page 381.
What will happen when the flood of guidance begins on all the various procedures and interactions that are described above? How will that information be disclosed to the public and how will the public ever be able to receive, assimilate and utilize the information in an effective manner? The can’t do so now under existing IRS rules and procedures. I have no doubt but that this will lead to yet another cottage industry of tax and legal professionals who charge citizens and businesses fees to navigate, negotiate and overcome the mountains of complicated procedures and regulations that will grow from the Act.
8. Health care audits. Under the individual responsibility mandate, citizens are required to purchase health care or face a penalty if they do not. Under the employer responsibility mandate, companies with more than fifty employees must provide coverage for their employees or face a penalty. The penalties are assessed and collected by the IRS. Individuals and businesses will be required to report their insurance information on their tax returns. Will these compliance mandates give birth to a new audit initiative by the IRS?
The purported purpose of the PPACA is to provide health care coverage to the vast majority of Americans. If a person required to have health coverage does not, isn’t he in violation of federal law? Likewise, if a required business fails to provide insurance to its employees, is it not in violation of federal law? And isn’t enforcement of the tax law the primary calling of the IRS?
Moreover, since the penalties are revenue-raising tools, why can’t we expect the IRS to make heath care audits a primary enforcement initiative? According to Douglas Elmendorf, director of the Congressional Budget Office, the federal government can expect to collect $17 billion by 2019 from the penalties associated with the individual mandate. The penalties collected from businesses under the employer mandate could be as much as $52 billion by 2019. See: Elmendorf, letter to House Speaker Nancy Pelosi, March 20, 2010. The Supreme Court in National Federation acknowledged these very numbers when it decided that the penalty provision of the Act is really a tax. The Court stated that the “essential feature of any tax” is that it “produces at least some revenue for the Government.” National Federation of Independent Businesses v. Sebelius, Slip Opinion, page 16.
The projected revenue is big dough at a time when the federal government is more strapped for money than at any other time in our history. I don’t expect the IRS to just leave this money on the table. That means proactive enforcement of the penalty provisions and that means health care coverage audits of American citizens and businesses.
9. Collecting the penalties. During the congressional debate on health care reform, there was much discussion about how the IRS would collect the penalty against individuals for failure to maintain minimal essential coverage. The concern was that the IRS would be able to use all of the collection tools at its disposal to collect a penalty, including liens and levies.
Code section 5000A(g) addresses the procedure regarding the assessment and collection of the penalty. It states, in part:
The penalty provided by this section shall be paid upon notice and demand by the Secretary, and except as provided in paragraph (2), shall be assessed and collected in the same manner as an assessable penalty…”
An “assessable penalty” under the code means that the penalty is summarily assessed, without any prior appeal or review rights afforded to the taxpayer. Such penalties are quite common regarding employment taxes. Congress’s justification for imposing “assessable penalties” regarding employment taxes is that since the employment taxes are held in trust by the employer for the benefit of the government, the urgency of collecting these taxes outweighs the taxpayers’ interest in appeal safeguards. In other words, “We need the money so forget the appeals process.”
Apparently the same logic applies to the penalty for not maintaining adequate insurance coverage.
But there is a limitation as to how the penalty can be collected. The IRS is precluded from using its levy power to collect such an assessment and it’s precluded from filing tax liens with regard to such an assessment. Code section 5000A(g)(2)(B). However, the IRS can use every other tool available that it might use to collect any other liability. Those tools include:
- Federal refund offsets. The IRS can offset your tax refund against a penalty assessment. Thus, your federal tax refund can be reduced to pay any penalty.
- State refund offsets. Likewise, the IRS can notify any state or local taxing authority that it will offset any refund the state or local government owes you to pay the penalty. Some might argue that this is a levy, prohibited by law. However, this may be a matter of semantics, depending upon how the IRS proceeds.
- Application of undesignated payments. If you send a payment to the IRS that is not specifically designated in writing to apply to a specific debt, the IRS can apply that undesignated payment “in the best interest of the government.” And since the IRS can use its levy power to collect income tax debts but not the penalty in question here, it will apply an undesignated payment against the penalty assessment and levy your paycheck to collect the income tax debt.
The net effect for the taxpayer: you got hit with a levy to collect a delinquent debt owed to the IRS. In short, the IRS gets the money, one way or another. The limitation on lien and levy power is a hollow benefit.
Please note that this limitation applies only to the individual penalty under section 5000A. It does not apply to the business penalty under section 4980H. Businesses will be subject to the full wrath of the IRS’s collection machine.
10. The list goes on. Given the scope of the PPACA, there is no telling how deep the tentacles of the IRS will sink into the fabric of our lives and businesses. One thing is for sure—they will sink far deeper than the typical American ever imagined. As yet another example of this, let’s discuss the exemptions that apply to the individual mandate. One such exemption applies to those who cannot afford coverage, either because their required premium is too high or their income is too low, or both. See code section 5000A(e)(1).
Certainly the determination of these two issues is subject to some kind of IRS audit. The IRS rarely takes a citizen’s “word” for the disclosures on a tax return when it comes to an income tax audit. Why would they do so when it comes to determining the applicability of an exemption under the law?
Another exception applies if a citizen has “suffered a hardship with respect to the capability to obtain coverage under a qualified health plan.” Code section 5000A(e)(5). The term “hardship” as used here is undefined in the tax code. We have to expect that it will be defined by regulation. The statute provides that the determination of “hardship” is to be made by the Department of Health and Human Services. Thus, communication must occur between the HHS, the IRS and the citizen for this determination to implemented correctly. And this raises the same questions regarding the right to appeal adverse determinations that I discussed above.
Taxpayer Advocate Service Being Shut Out of the Process
The above discussion reveals, at a minimum—
- The massive potential for abuse and misuse of taxpayers’ rights in the process of administering the PPACA,
- The horrific invasion (or dare I say, destruction) of privacy in the most important and personal areas of our lives, and
- The loss of control and choice that we have in determining and controlling our health care expenditures under the PPACA.
In light of these facts and the questions raised in this report, we can see that there must be substantial consideration given to taxpayers’ rights in the processes of the ascertainment, calculation, assessment and collection of the massive amounts of information and tens of billions of dollars in penalties at stake under the law. Historically, that is the job of the Taxpayer Advocate Service.
But the National Taxpayer Advocate is being shut out of the discussion.
The IRS set up a health care program office to guide its efforts to implement the law. The agency established four teams to work on specific challenges with an eye toward creating the systems the IRS needs to do the job Congress thrust upon it. According to the NTA’s Annual Report to Congress,
The National Taxpayer Advocate has repeatedly asked that TAS be included in these teams and has offered her senior advisors to serve on them. The National Taxpayer Advocate is concerned the IRS declined to include TAS members on the teams, increasing the risk that the IRS will make operational decisions that are best for itself without adequate consideration of taxpayer impact. NTA, Annual Report to Congress, December 31, 2010, Vol. 2, page 19.
If TAS is shut out of the process, there simply will be nobody at any level within the system to protect taxpayers’ rights. The good news is that the NTA is not taking “no” for an answer. Her report goes on to state:
Despite the exclusion of TAS from the IRS’s health care implementation teams, TAS is undertaking its own efforts. The National Taxpayer Advocate convened an internal team of TAS executives and other employees who meet bi-weekly to discuss the various provisions and identify potential problems and implications for taxpayers, the IRS, and TAS. Ibid.
The fact that the NTA is forcing the issue is a good thing. The reality, however, is that her power in this regard is limited. It simply remains to be seen the extent to which her office will shape the processes that effect taxpayers’ rights under the PPACA. More importantly, as I’ve stated throughout this report, in many cases, the IRS is not the decision-maker. So that begs the question, who will be protecting taxpayers within the numerous other agencies involved with the PPACA, most notably, the exchanges?
“Free” Health Care is Far From Free
In addition to the wildly complicated health insurance and penalty scheme outlined above, the PPACA contains a host of new taxes intended to fund the scheme. You might have thought the new health insurance benefits were free. They are not. According to the Cato Institute, under the law, the top 1 percent of income earners can expect tax hikes of up to $52,000 per year. See: Bad Medicine, A Guide to the Real Costs and Consequences of the New Health Care Law, Michael D. Tanner, Cato Institute, 2010, page 21.
But as you’ll quickly see, it’s not just high-income earners who will feel the pinch. Given the nature of the tax hikes, nearly all Americans will pay more. Here’s a list of the tax hikes in the PPACA.
1. Limit on itemized deductions. Beginning in 2013, the adjusted gross income threshold for claiming a deduction for medical expenses goes up from 7.5 percent to 10 percent. Thus, every taxpayer who files a Schedule A to itemize deductions will see reduction in the amount of medical expenses that are deductible, and a corresponding increase in their taxes.
2. Tax on medical devices. A 2.9 percent tax is imposed on the sale of all medical devices in the United States. This includes everything from expensive diatonic equipment to simple forceps. The Secretary of Health and Human Services has the authority to waive this tax for items sold at retail for use by the public. However, it is unclear how such a waiver is obtained and the proof required to obtain it.
3. Tax on prescription drugs. This tax applies to all brand name prescription drugs sold in the United States. It’s an excise tax imposed on the pharmaceutical company that produces the drug. The tax is imposed in the aggregate then a pro rata share is passed on to each manufacturer using a complicated formula. The amount to be raised ranges from $2.5 billion in 2011 to $4.2 billion in 2018. This tax will most certainly be passed on to consumers in the form of higher drug prices.
4. Tax on “Cadillac” insurance plans. This is a tax on high-cost insurance plans. Beginning in 2018, there is a 40 percent excise tax imposed on any employer-provided health plan with an actuarial value of more than $10,200 for an individual and $27,500 for families. Thus, if you policy is “too good,” your employer will pay a substantial tax if he continues to provide it.
5. The payroll tax hike. The Medicare payroll tax goes from 2.9 to 3.8 percent for persons with incomes over $200,000 (single) and $250,000 (married).
6. The tax on investment income. Beginning in 2013, a 3.8 percent tax gets assessed on all capital gain, interest and dividend income for persons with incomes over $200,000 (single) and $250,000 (married).
7. Tax on tanning services. There is a 10 percent tax imposed on tanning salons already in effect.
8. Tax on health insurance companies. This tax is similar to that assessed on drug manufacturers. It is an aggregate assessment imposed on individual insurers based upon their market share. The assessment goes from $8 billion and rises to $14.3 billion by 2018. In years following 2018, the tax grows by a percentage equal to the rise in premiums charged in the previous year. Thus, if premiums go up by 10 percent, the tax will rise accordingly.
In every case, these taxes will be paid by consumers in the form of higher prices for the products and services covered by the tax. And all of this adds to the already massive compliance burden carried by businesses and the administrative nightmare the IRS must deal with under the other elements of the PPACA.
Not since the Medicare and Medicaid Acts of the 1960s has Congress imparted so much power to government agencies to carry out social programs. But those programs pale in comparison to the scope and power usurped by the federal government under the PPACA.
Fully informed Americans would never have voted for this scheme, nor would they have supported politicians who voted for it, if they had any idea of the vast extent to which the federal government would drill into their private affairs and control the most important and personal decisions they make.
In fact, I have come to believe that Speaker Nancy Pelosi’s remark that “we have to pass the bill so that you can find out what’s in it,” was not a misstatement or inadvertent fumble. She had to know that all reasonable Americans would be outraged at the extent to which the IRS and other federal agencies would gain access to their personal affairs and control their decisions. Moreover, she had to know that reasonable Americans would cringe at the idea of spending untold billions of dollars and hiring a literal army of new bureaucrats to staff government agencies (chiefly the IRS) to enforce federal mandates pointed at how they make decisions effecting their own families.
We know why Speaker Pelosi and those of her ilk couldn’t tell the truth about the PPACA.
The PPACA imposes costs and reporting burdens so vast, that when added to those that already exist, create a load that’s nearly impossible to carry. I do not believe it’s melodramatic to suggest that the costs and massive bureaucracy required to run this system could bring the IRS to its knees. And if it doesn’t, it would only be because Congress grows the IRS’s annual budget and workforce to previously unimaginable levels.
I cannot believe that’s what America wants. At approximately 100,000 employees and an annual budget of nearly $13.5 billion, the IRS is already the largest police force in the world. How much larger will it grow under this bill? There’s no way to fashion a reasonable guess, other than to say that whatever the growth is, free people don’t want it and a free nation cannot tolerate it.
To be sure – it’s a new day in America. We cannot help but be deeply concerned about the impending storm. Freedom loving people must take whatever steps they can to push for the repeal of the PPACA and restore liberty to America.
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