The Not-So-Mandatory Individual Mandate

Jordan BarryBryan Camp

Patient Protection and Affordable Care Act (PPACA)

• Major Piece of Legislation (2,400+ Pages)– Increases Federal Spending on Healthcare for Low-

Income Individuals and Families– Creates Insurance Exchanges – Incentives for Employers to Provide Employees

Health Insurance– Prohibits Discrimination Based on Pre-Existing

Conditions• Adverse Selection

“Individual Mandate”

• Applies to Most U.S. Citizens – Requires “Minimum Essential Coverage” – Both for Themselves and Dependents

• Enforced by a Tax Penalty

Tax Penalty

• Sole Enforcement Mechanism for Individual Mandate – “Neither the Act nor any other law attaches negative

legal consequences to not buying health insurance, beyond requiring a payment to the IRS.” SCOTUS, in HHS v. Florida.

– “[I]t is the interpretation of the agencies charged with interpreting this statute, [Treasury and HHS], that there is no other consequence apart from the tax penalty.” S.G. Verilli, Oral Argument

Tax Penalty Issues

• Amount Too Low?– CBO Estimates 4M People Will Choose to Pay the

Penalty Rather Than Buy Insurance

• Collection?

Tax Collection Tools

• Criminal Penalties

• Federal Tax Lien

• Levies

• Lawsuits

• Offsets

Federal Tax Lien

• Arises Automatically – IRS Makes Proper Assessment– Gives Proper Notice and Demand for Payment– Taxpayer Fails to Pay in FullNo Initial Public RecordPerfected as of Assessment Date

• Enforceable Against Everyone But “Four Horsemen”– For Them, Need Notice of Federal Tax Lien (NFTL)

Scope of the Federal Tax Lien

• Touches– All the Taxpayer’s Property– All Her Rights to Property– Any Property Received During the Life of the Lien

• Duration– Lasts at Least 10 Years– Easily Extendable– Retroactivity Makes It Hard to Avoid

IRS Levies

• IRS Can Seize and Sell – Anything Subject to the Federal Tax Lien• Any of the Taxpayer’s Property• Or Rights to Property

– Some Exceptions, But Fairly Narrow • Can Be in Third Parties’ Possession– Bank Accounts– Future Wages

• Third Parties Strongly Encouraged to Comply

Lawsuits

• Sections 7401 and 7403– Reduce Assessments to Judgments– Foreclose Tax Liens

• Supplement Administrative Remedies– Extending Collection Period– Overcoming Joint Ownership

Offsets

• Conceptually Simple– I Have $1K Outstanding Tax Liability from Last Year– I’m Entitled to a Net Refund of $3K This YearIRS Offsets These, Sends Me $2K

• Administratively Very Easy

• Also Used to Collect Non-Tax Payments– Other Amounts Owed to Fed’l or State Gov’t– Past-Due Child Support

Tax Penalty Collection: Criminal Penalties

• Completely Off the Table

• “In the case of any failure by a taxpayer to timely pay [the tax penalty], such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.”

Tax Penalty Collection: Levy

• Completely Off the Table (Probably)

• “The Secretary shall not” “levy on any” “property of a taxpayer” “with respect to [that taxpayer’s] failure [to pay the tax penalty]”

Tax Penalty Collection: Lien

• Wounded, But Still Alive

• “The Secretary shall not file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the [tax] penalty”

Tax Penalty Collection: Lien

• Somewhat Strange Effects– Questionable Use in Bankruptcy – Enforceable Against Taxpayer– Levy Leftovers?

• IRS’ ACA Website: “The law prohibits the IRS from using liens or levies to collect any payment you owe related to the individual responsibility provision . . . .”– http://

www.irs.gov/uac/Questions-and-Answers-on-the-Individual-Shared-Responsibility-Provision, Question 25

Tax Penalty Collection: Lawsuits

• Probably Untouched, But Unimportant– Disfavored by IRS Policy– Requires DOJ Involvement– Amount in Controversy Requirement– Amounts Too Small to Be Cost-Effective

• In 2010– 1.1M Notices of Federal Tax Lien– 3.3M Notices of Levy on Third Parties– Lawsuits Under 7403 Produced 46 Judicial

Opinions

Tax Penalty Collection: Offsets

• Expected to Be the Workhorse

• Relies on Other Overpayments

• Two Main Ways That Happens– Refundable Tax Credits • Mostly Target Low-Income Taxpayers• Low-Income Taxpayers Exempted from Tax Penalty

– Over-Withholding• Currently, Very Common• But Generally Avoidable

Key Takeaways

• The Individual Mandate Is Not Much of a Mandate– But May Not Matter in Practice

• Collection Provisions Would Benefit from Technical Corrections Bill

• Value of Having IRS Administer The Tax Penalty?

Thank You