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The Individual Mandate’s No Insurance Tax & the IRS: How Will they Collect?

Posted Apr 08 2010 12:00am

300px-irssvg Interesting article by Timothy Noah over at Slate on the enforceability (read, “collection”) of taxes assessed for failure to procure insurance under the individual mandate contained within the new Health Reform law.

Noah, working with some posts from Prof. Timothy Jost and some recent comments from the IRS Commissioner, Douglas Shulman, notes provisions within the bill that will make enforcement difficult. They are worth noting.

As the failure to procure assessment is a tax, the IRS is charged with its collection. Verification will be done through a form similar to the 1099 for bank interest, but this form will be received from one’s insurance company. You will then attach that form to your tax return. And if you don’t and do not pay the either $695 or 2.5% of your income–whichever is higher? The Health Reform law imposes fairly stringent restrictions upon the form that collection efforts may take. From Noah :

What if your failure to obtain health insurance means you owe the penalty but you nonetheless refuse to pay it? That’s where things get tricky. The IRS can’t throw you in jail, because the health reform law explicitly states ( on Page 336 ): “In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.”

Nor can the IRS seize your property, because the law states (also on Page 336 ) that the health and human services secretary may not “file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty … or levy on any such property with respect to such failure.”

So without the ability to prosecute, penalize, or file a notice of lien–what’s left? As Noah notes, Tim Jost points out that most people, desirous of obeying the law generally, will do so in this matter particularly. And many who do not have health insurance–often the self-employed or independent contractors of some sort or another with long complex and deduction riddled tax returns–will be prudently averse to raising the red flag of  civil disobedience.

According to Commissioner Shulman (again via Noah who took the time to transcribe Shulman’s press conference in its pertinent parts),

“People will get letters from us. We can actually do collection if need be. People can get offsets of their tax returns in future years, so there’s a variety of ways for us to focus on things like fraud, things like abuse, and we’re gonna run a balanced program.”

Noah then asks a rather interesting series of questions:

But if the IRS owes you a refund, isn’t that refund in effect your property? And if the IRS decides to withhold part or all of that refund because you didn’t pay your tax penalty for not obtaining health insurance, doesn’t that amount to seizure of your property? Or was Shulman just talking about people who might claim they paid the penalty but really didn’t, or who might claim that one of the law’s exemptions applied to them when it really didn’t, or who might engage in some other form of conscious duplicity that violated some other statute? (Is that what Shulman meant by “things like fraud, things like abuse”?) I’m not certain Shulman’s reply addressed the scenario Jost envisioned, wherein a civilly disobedient citizen would forthrightly tell the IRS:

First things first, I would argue that fraud and duplicity are separate from merely not paying or refusing to pay. Congress enjoined the prosecution or the levy of liens for a failure to pay–that does not include, in my estimation, a similar proscription against prosecuting tax fraud– which is what such “conscious duplicity” would entail. Separate matter, separate punishment– which I think the Commissioner alludes to in the above quote.

As for the withholding of a refund? It is, I believe, a valid exercise of the office. It may, however, for analysis, be easier to think of the practice as “an offset,” not a withholding of refund. It’s an important distinction under these circumstances and the Commissioner spoke in terms of “offset.”  The IRS will not so much be keeping your refund from you, as they will be merely utilizing the money withheld for its explicitly intended purpose: to pay a valid tax. In the scheme of things it would not be proper to say that the IRS owed you a $1000 refund, but then deducted $695 tax from your refund for your failure to have health insurance, and thereby left you with a refund of only $305.

They never owed you $1000 to begin with. Because you didn’t have health insurance, you owed an additional $695 in tax. You never had $1000 coming from the IRS. They only ever owed you $305; the “refund” being that which remains after all your tax has been paid. The other $695, by law, was always theirs and they have merely used the money set aside (for most people, incrementally through each paycheck) in the manner for which it was intended: to pay a valid tax. It is not “seizure,” merely appropriate allocation.

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