Published June 29, 2012
IRS officials on background tell FOX Business the U.S. Supreme Court ruling on health reform gives the IRS even more powers than previously understood.
The IRS now gets to know about a small business's entire payroll, the level of their insurance coverage -- and it gets to know the income of not just the primary breadwinner in your house, but your entire family’s income, in order to assess/collect the mandated tax.
Plus, it gets to share your personal info with all sorts of government agencies, insurance companies and employers.
And that's just the tip of the iceberg. "We expect even more lien and levy powers," an IRS official says. Even the Taxpayer Advocate is deeply concerned.
The IRS army will inexorably increase in size, too. The IRS will now add new agents to hunt down tax cheats, as it has been budgeted to spend $303.5 million building a new system, erected on the back of its old system, to oversee the effects of the health law, including making sure people get the new tax credits they deserve under the law.
As for the new IRS workers, the Government Accountability Office said the total will be about 4,500, with nearly 4,000 slated for enforcement.
On the $303.5 million for health care, the GAO said the IRS will “continue the development of new systems and modifications of existing systems as well as other IRS enforcement systems for health reform."
Throughout, the IRS will be the agency enforcing the law, collecting these mandate penalties, as well as determining whether individuals buy “adequate” health coverage, and whether small businesses provide “affordable” coverage to workers under the new law.
However, Nina E. Olson, who runs the Taxpayer Advocate Office [TAO], a federal IRS overseer, has warned the new health law may require more IRS intrusions on taxpayer privacy, to determine whether individuals got appropriate health coverage, and whether small businesses provide “affordable” coverage, all of which is defined by the government.
That’s because the health-reform law’s individual mandate requires almost all legal residents of the United States to have “adequate” health-care coverage, as determined by the federal government. And it requires businesses of all sizes must provide “affordable” coverage as defined by the federal government.
Health reform’s insurance mandate says if you do not have “adequate” insurance, you’ll have to pay a fine as part of your tax return. If your business doesn’t provide “affordable” coverage, that business may have to pay a fine to the IRS, too, as part of its tax return filings.
The TAO has noted Americans must now tell the IRS under the new law:
*Insurance plan information, including who is covered under the plan and the dates of coverage;
*The costs of your family’s health insurance plans;
*Whether a taxpayer had an offer of employer-sponsored health insurance;
*The cost of employer-sponsored insurance;
*Whether a taxpayer received a premium tax credit; and
*Whether a taxpayer has an exemption from the individual responsibility requirement.
The TAO has warned: “This is different from the type of information the IRS typically deals with, and some taxpayers may feel uncomfortable about sharing it with the IRS.”
Olson has said the new law could even ramp up tax evasion: “As a result, some taxpayers could be tempted to not file a tax return or file a return with incorrect or incomplete information, creating problems for both the taxpayer and the IRS."
The TAO has also reported that “obtaining this new information will require the IRS to communicate with entities and government agencies that it may not deal with now,” including:
*New state-run insurance exchanges;
*Insurance companies; and
*Government insurance programs.
But the TAO has warned that the IRS may not have the necessary skill sets, budget, or staffing to adequately enforce the new health reform law.
Olson notes that the federal tax code is already so complex that even the IRS makes numerous mistakes in administering it.
In the TAO’s 2010 annual report, the service’s overseer says that Congress has been forcing the IRS to oversee more and more social benefit programs, including the Affordable Care Act.
Already, the IRS enforces and collects Medicare and Social Security taxes, making those federal programs’ overhead costs appear lower than they are.
"As part of the recent health-care legislation, the IRS will face a number of decisions and guidance projects unrelated to its employees' traditional expertise and skill set," the TAO has said, and now, with the new law, "the IRS must administer the following health care provisions: the Premium Assistance Credit, the Individual Penalty for Lack of Coverage, the Employer Penalty, and the Small Business Tax Credit."
The IRS should revise its mission statement to make it clear that it is administering social benefits as well as collecting revenue, TAO said.
And it’s the intrusiveness of the health reform law that has raised eyebrows. What does the IRS base your mandate penalty on? This is where it gets nutty.
The TAO says that the “IRS will need to determine a taxpayer's compliance with the individual [insurance] mandate and assess a penalty if coverage is inadequate.”
However, the penalty isn’t based on just your personal net income. The penalty will be based on an entirely different number that is more than just your paycheck earnings — your ‘household income.’
“This determination is based on a concept of 'household income,’” TAO has said, adding, “this may differ from the income reported on the taxpayer's return, because it is a composite of all of the income reported by members of a taxpayer's household -- information that may not be readily accessible to the IRS."
If the IRS finds you have fallen short of the law, it would hit you with a penalty tied to your household income (which may be that of an individual or several family members).
Under the new health law, the IRS penalty would be based on “modified adjusted gross income,” not adjusted gross income that you normally report at the bottom of the first page of your tax form 1040, before you take deductions or personal exemptions.
The modifications add back in things like non-taxable interest and excluded foreign income to this number.
Next, to assess the fine, the IRS would take the total household income divided by the number of household members who must have insurance under the law.
This raises questions of your responsibility for your other household members to abide by the new health reform law. All of this could mean a heavier enforcement hand at the IRS.
The IRS will need more training in privacy requirements, in order to avoid a drop in tax compliance, the TAO said, as taxpayers may feel they need to protect their confidential household income information for everyone who lives under the same roof. And that could also mean more IRS lien and levy powers.
And what would your health reform penalty look like?
The IRS penalty is either a fixed dollar amount, or a percentage of income above the filing threshold, whichever is greater. The law sets the fixed dollar penalty at $95 in 2014, $325 in 2015, $695 in 2016, and indexed to inflation thereafter (capped for a family at 300% of the individual amount).
The percentage of income penalty rises at a lower rate than the fixed dollar amount, from 1% in 2014, to 2% in 2015, and to 2.5% in 2016 and after, and then is capped at the national average premium for what’s called “bronze” coverage, which provides the least amount of coverage under the new law, 60% before the patient must chip in for co-insurance, deductibles and co-payments.
There’s more. Small businesses may get hit too. Less than half of small businesses insure workers, says a House Committee on small business. About 60% of America’s uninsured -- or 28 million -- are small business owners, workers, and their families, it says, adding insurance costs for small businesses have increased 129% since 2000.
The IRS and Treasury have put out for public feedback a new rule to help small businesses contend with a big penalty under health reform that could potentially smack them with tens of thousands of dollars in costs, a fine that could hit already cash-strapped small businesses.
Submarined in the new health-reform law is this big onerous penalty, called a “shared responsibility payment,” that the government can slap against businesses with more than 50 workers if they don’t provide “affordable” health benefits to their full-time employees, which the government gets to define.
The health-reform law exempts all small businesses with fewer than 50 employees from the law’s “shared responsibility requirement,” which begins in 2014. But beginning in 2014, employers with 50 or more employees that do not offer health insurance coverage will pay a fine of $2,000 per full-time worker if any of their employees turn around and get premium tax credits through the new health insurance exchanges.
Even if the small business has 51 workers, and that one worker gets a tax credit to help them buy insurance -- a tax credit provided under health reform -- the small business still has to pay a fine.
And beginning in 2014, the government will slap businesses with a higher, $3,000-per-employee penalty if the government finds they provide workers “unaffordable” health insurance. And who gets to define “unaffordable”? The government.
How is it defined? The government will assess the $3,000 penalty if any worker has to take a tax credit or has to enroll in state health exchanges because his or her boss pays less than 60% of the full value of the coverage, or the premium the employee pays is more than 9.5% of household income.
Again, this means more IRS intrusion into small businesses.
But the Treasury Department and the IRS have asked for input from the public on a proposed “safe harbor” for 2014 that says small businesses would not have to pay the new fine, so long as they can prove to the government their health insurance is really “affordable.”
So how can companies qualify for this safe harbor?
Watch this – because again health reform has raised serious privacy issues about how much the government can know.
The small business has to prove to the IRS that its insurance is affordable by showing the government the wages that it paid to employees, instead of reporting to the government the employee’s household income.
Meaning, the IRS would deem a business’s coverage affordable so long as a worker’s premium costs did not exceed 9.5% of his W-2 wages.
The IRS said in a statement: “By allowing employers to base their affordability calculations on each employee's W-2 wages (which employers know) instead of each employee's household income (which employers generally would not know), the safe harbor could provide a more workable and practical method for measuring the affordability of an employer's coverage.”
Want to see the headaches the small business has to go through to figure out the penalty owed to the government? The penalty is $2,000 per employee, but the business must first knock out from the math the first 30 workers -- part-timers don’t count.
Example: If you have 51 full-time employees and 15 part-time employees throughout the year, and one full-time employee is receiving a tax credit to help them buy health insurance, your business will have to pay:
51 (the number of full time employees) - 30 (the first 30 employees are excluded)
21 x $ 2,000 = $42,000