“This year, as many as 6 million taxpayers will learn that they now owe a “Shared Responsibility Payment” because they didn’t have health insurance last year.
The SRP is a clumsy euphemism for the ObamaCare individual mandate tax penalty, which is $95 or 1% of household income, whichever is greater, for those who didn’t have insurance in 2014. That increases to the greater of $325 or 2% of income for those who don’t have insurance this year, and then to $695 or 2.5% of income the year after that.
The mandate and the tax penalty behind it are core elements of the health law, but it’s becoming increasingly apparent that they are relatively toothless. There are dozens of exemptions available, some of which require no paperwork. It can be far less complicated to avoid the ObamaCare tax penalty than pay it. And the already overworked Internal Revenue Service has little authority to collect any unpaid penalty taxes due.
This has led industry analyst Robert Laszewski to ask “is there really an individual mandate?”
Critics and opponents agree that without the individual mandate, ObamaCare has little chance of success. When Solicitor General Donald Verrilli argued for the constitutionality of the mandate before the Supreme Court in 2012, he stated emphatically that without it, ObamaCare would “make matters worse, not better.
“There will be fewer people covered; it will cost more,” he said, pointing to states that had already tried ObamaCare-style reforms without a requirement to buy insurance. In those states, the young and healthy just waited until they got sick to buy insurance. That drove up premiums, pushing out more people.
The tax penalty, in turn, is key to making the mandate work.
But it’s anyone’s guess as to whether the penalty will have much impact. The main reasons:
Widespread exemptions. The Congressional Budget Office figures that of the 30 million who don’t buy insurance next year, only 7 million will actually end up facing the mandate penalty.
An IRS table lists 19 categories of exemptions, only nine of which require approval by an ObamaCare exchange. Even then, taxpayers can simply put “pending” on their tax forms if they’ve applied to an exchange for one of these waivers but hadn’t heard back by the time they filed.
And one of these 19 exemptions — which covers “general hardship” — lists 14 qualifying categories, including death in the family, property damage and unexpected costs of caring for a family member. One hardship exemption requires only that you provide evidence of a utility shut-off notice. The spousal abuse hardship exemption doesn’t require any supporting evidence, according to the application form.
TurboTax offers a free service that helps taxpayers see if they can avoid the penalty. “We’ll check through more than 20 ways you could be exempt” — in three minutes or less — the site promises.
Penalty complexity. When filling out the new Form 1040, taxpayers can check a box indicating that they had “full-year coverage.” Anyone who checks this box doesn’t have to pay the penalty, fill out any additional forms or submit any evidence of coverage, leaving it to the IRS to determine whether they were properly insured.
Those who don’t check this “full-year coverage” box, in contrast, must locate a complicated worksheet in a separate instruction booklet to determine the size of their penalty. The worksheet requires taxpayers to indicate each month that they, their spouse or dependents didn’t have government-approved insurance, and then do a series of calculations to see what they owe.
Some tax professionals admit that there is little to keep someone from just checking the box and avoiding the extra hassle and cost of figuring out the penalty, even if they didn’t technically meet the requirement for “full-year coverage.”
Overworked and neutered IRS. In addition, the chances that those avoiding the penalty will be caught are likely to be low, since the IRS is already stretched thin as it is. The agency’s budget has dropped 18% in real terms just since 2010, leading IRS Taxpayer Advocate Nina Olson to complain about the “widening imbalance between the IRS’s increasing workload and its shrinking resources.”
IRS officials say they need $67 million and 438 more workers in 2016 just to deal with ObamaCare.
Even if the IRS does catch “noncompliance,” there’s little it can do about it.
When Democrats crafted the ObamaCare legislation, they tried to soften the blow of the individual mandate penalty by specifically banning most IRS collection tools needed to recover delinquent payments. As Olson put it, “While the IRS has the authority to offset refunds or credits to collect the SRP, it does not have the authority to collect through the use of liens and seizures.”
She also notes that those who don’t pay the ObamaCare penalty are “not subject to criminal or civil penalties.”
In other words, the IRS can deduct unpaid penalties from tax refunds due to those taxpayers, but basically has no other way to make them pay up.
The administration is counting on the uninsured to pay $47 billion in tax penalties over the next decade. But it’s likely the actual amount will come in far short of that mark. Closing exemptions and beefing up enforcement will only get harder politically as the penalty rises.
And so, with a weak and permeable individual mandate, and lax enforcement of the tax penalty, ObamaCare could easily contain the seeds of its own destruction.