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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 law.
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 checks.
“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 insurance.
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, 10/13/10).
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.”
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