By Brett Ferguson and Heather M. Rothman
The Supreme Court said June 28 that the key provisions of the health care
overhaul can stand, but tax professionals told BNA many questions still remain
about how and whether the Internal Revenue Service will be able to enforce the
A top concern is that when the statutory tax penalty for individuals not
carrying health insurance under the Patient Protection and Affordable Care Act
goes into effect in 2015, IRS may have few options for collecting the penalties
because Congress restricted the agency's collection authority.
Unlike most other types of tax debts, IRS cannot file a tax lien against
individuals who do not comply with the health insurance mandate and can only
collect the money by withholding it from tax refunds or Social Security
“This [Supreme Court] opinion is a bit vague on this. It doesn't parse that
out and the court doesn't say how the IRS can collect. It just says if you pay
the tax instead of getting insurance, you're compliant with the law,” said Jeff
Paravano, managing partner of Baker Hostetler's Washington office.
Paravano said the result is that there will be a lot of questions about what
the IRS believes it can do to collect the tax.
“It would be helpful to hear from the agency itself regarding collection
authority,” Paravano said, noting that filing a lien is excluded under the law
but IRS is “probably looking at ways to collect the money.”
Christopher Condeluci, a tax attorney with Venable LLP, agreed, saying the
individual mandate “has no teeth.”
IRS Commissioner Douglas Shulman's testimony on the topic to Congress has
“almost said we're just going to write [non-paying individuals] a letter,”
Condeluci told BNA.
There is also an issue for IRS and Congress because the law exempts
individuals with incomes below the filing threshold from the tax and the tax
itself is relatively modest--the greater of a maximum flat fee of up to $2,085
for a family or 2.5 percent of modified adjusted gross income--so some
households may decide it is cheaper for them to pay the penalty rather than buy
The Congressional Budget Office estimated that 4 million will choose to pay
the penalty rather than buy health insurance, but Paravano said he suspects a
“whole lot more than 4 million people will choose not to pay it.”
“The penalty would almost always be more attractive, especially now that the
law says companies can't charge people more for having pre-existing conditions
and cannot be turned away,” Paravano said.
Attorneys also said a number of important details of the tax-related
provisions still need to be hashed out by IRS in its rulemaking process,
including how the agency thinks the law's 40 percent excise tax on high-cost
health insurance plans should be calculated, as well as implementing new taxes
on pharmaceuticals and medical devices and issuing tax credits and premium
assistance for individuals participating in state health care exchanges.
“If I was a stakeholder, I would focus my attention on the regulators because
they are more likely to come out with some type of guidance that relaxes the
rules, as opposed to relying on Congress to get it done,” Condeluci said.
Condeluci also noted that regulators can have a non-enforcement period where
they do not implement the law, which is a step they can take without needing
congressional approval or an executive order from President Obama. As an
example, Condeluci pointed to an Oct. 2010 announcement (Notice 2010-69) from
the IRS providing a one-year delay for employers from the requirement to report
the cost of health coverage on their employees' Form W-2s (196 DTR G-1,
Katie Mahoney, the executive director for health care policy at the U.S.
Chamber of Congress, agreed that the strategy should be to focus on the
regulators, but said she is not sure how viable that option is because the
agencies “have been pretty pragmatic … when they see the negative consequences
of regulations they've proposed … but I also know they feel very strongly about
what the law requires them to do.”
Mahoney said the Chamber--which supports striking down the entire law--has
told its member to continue lobbying lawmakers on the tax provisions in the law,
so that they know that going forward they are unfavorable policies and are
harmful to the economy.
Sen. Charles Grassley (R-Iowa) said the enormity of the job facing IRS in
writing the rules and trying to enforce them leaves him skeptical that the
agency is up to the task.
The latest estimates are that there is already at least $385 billion a year
in taxes that are being underpaid or underreported that the government is unable
to collect, providing evidence that IRS is already ineffective as executing its
primary mission of enforcing revenue laws, Grassley said.
“IRS is just now starting to increase its enforcement efforts, which had
declined significantly after the restructuring a decade ago. But, just like many
other federal agencies, it is facing a human resources crisis--more than 50
percent of its workforce is expected to retire in the near future. So it doesn't
have the resources it needs to do its first job, never mind a whole new one like
administering health reform,” Grassley warned on the Senate floor.
Grassley pointed to several independent reviews done by the Treasury
Inspector General for Tax Administration (TIGTA) that have shown that IRS has
had problems in enforcing the Making Work Pay Credit, the Homebuyer Tax Credit,
the Earned Income Tax Credit, and the Health Coverage Tax Credit.
TIGTA said 72 percent of filers claiming the Health Coverage Tax Credit did
not have the required documentation attached and more than 1,200 individuals
appeared to have wrongly claimed $1.8 million in the credits on their federal
tax returns (213 DTR G-1, 11/6/09).
Grassley said, “My Democratic colleagues in the Congress and the
administration have many ideas for new and complex ways to tax individuals and
small businesses to fund all sorts of new spending. It would seem wise to make
sure the IRS can enforce the tax laws before being charged with administering
the new social programs created because of health reform.”