IRS may never recoup $350 million in Obamacare tax credit overpayments

The Washington Times reports:

“A quirk in the law means the IRS will never be able to recoup nearly $350 million in overpayments on Obamacare tax credits last year, and one top senator says he is worried that fraudsters will exploit the loophole to wring more cash out of the government.

Most customers in the health care law’s insurance exchanges get taxpayer-funded subsidies to help cover their premiums, and the amount is based on their expected earnings. At the end of the year, they are supposed to square their anticipated earnings with what they actually made. Because most exchange members received higher incomes — through promotions or better jobs — they have to repay the IRS.

The Affordable Care Act sets a cap on the top repayment amount, so consumers don’t get sticker shock at tax time. But Senate Judiciary Committee Chairman Chuck Grassley, the Iowa Republican who has emerged as a key watchdog on Obamacare, said some exchange customers could intentionally misestimate their earnings, breach the cap and then avoid having to pay it all back.

“It’s unclear how many people might be intentionally underestimating their income to get an overpayment, and whether the statutory repayment cap should be changed to minimize this incentive,” Mr. Grassley said. “The challenge is to balance cracking down on the intentional gaming of the credit with fairly treating taxpayers who have been overpaid through no fault of their own.”

The large sums involved — several billion dollars over the next decade — could be particularly enticing for lawmakers scrambling to find every last cent to pump into other priorities, such as roads and bridges.

Top Republicans hoping to repeal Obamacare say the overpayment issue is another symptom of a confusing law that puts the burden on low- and middle-income Americans and is proving susceptible to fraud.

The Health and Human Services Department’s inspector general piled on Monday with a report that found the federal website for applying for coverage on the exchanges didn’t accurately vet each enrollee for items such as citizenship, household income and family size during the law’s first sign-up period, meaning some people may not have qualified for benefits they received last year.

The Centers for Medicare and Medicaid Services said it has rectified many of the issues highlighted in the report and is “continuously improving and refining” the process.

The inspector general also found that the administration was too generous in deciding that consumers made a “good-faith effort” to extend the 90-day period for resolving inconsistencies between their applications and government data sources.

Raising the caps

Obamacare defenders warn against being too harsh on customers because it doesn’t make sense to demand full repayment of excessive subsidies in some cases. They say the caps should be eased rather than toughened.

“You may end up with situations where your income is erratic, through no fault of your own,” said Cheryl Fish-Parcham, the private insurance director at Families USA, which advocates for an affordable U.S. health care system.

As it stands, subsidized customers who underestimate their income must pay back no more than $1,250 — $2,500 for families — although repayments among low-income and midrange earners are capped at $300 and $750 ($600 and $1,500 for families), respectively.

The law was originally far more generous, recapping the amount the government could reclaim at $250 for individuals and $400 for families.

But Congress has twice passed bills raising the caps, freeing up more money to spend on other bipartisan initiatives — first in 2010 as part of the annual “doc fix” to stave off cuts to Medicare reimbursements for doctors, and in 2011 to pay for repeal of Obamacare’s unpopular “1099” provision, which would have required businesses to fill out tax forms every time they paid vendors $600 or more.

President Obama signed those changes into law even as Democrats complained that lifting the caps amounted to a tax increase on low- and middle-income Americans.

Still, about 400,000 people estimated their incomes so badly last year that they ended up keeping money they didn’t deserve — to the tune of $345 million, IRS Commissioner John Koskinen told Congress last month.

The money usually goes straight to insurers, though the customers are responsible for paying back overpayments. Once they hit the repayment cap, however, the extra money amounts to a taxpayer-funded benefit that they didn’t deserve.

The IRS couldn’t say what the average overpayment was for the 400,000 or so customers who didn’t have to make full repayments.

It’s unclear whether Obamacare customers have the guile and sophistication to work the arcane system to their advantage, although gaming of the tax system is common, and government investigators raised red flags when they were able to enroll 11 fake enrollees into Obamacare and keep their coverage for a second year.

Congress doesn’t appear to have the appetite to go after the money. Aides in the House and Senate said there aren’t immediate plans to erase or raise the caps.

Republicans say the only solution is to repeal Obamacare outright with a Republican president in 2017, clearing the decks for their own, yet-to-be-determined plan.

“Obamacare’s subsidy structure is so complicated that it’s nearly impossible for Americans to get the math right,” said Sen. John Barrasso, Wyoming Republican. “These people shouldn’t be punished because of an incompetent government. The solution is to replace Obamacare with a simpler and fairer system.”

Timothy Jost, a law professor at Washington and Lee University who closely tracks the health care law, said exchange customers should get better at estimating their income over time, and 2014 might have been an aberrant year as customers had a difficult time logging onto balky Web systems to update their income status.

“We’re going to get a closer fix on what people actually owe,” he said.”