6 New IRS Questions for 2014
The recent Internal Revenue Service scandal — career officials deliberately delaying applications of certain organizations for tax-exempt status, and the IRS commissioner and acting commissioner are accused of lying to Congress about the matter — suggests that the agency should be smaller, rather than larger.
But the IRS is about to balloon to accommodate new responsibilities under the Affordable Care Act.
Sarah Hall Ingram, commissioner of the Tax-Exempt and Government Entities Division from 2009 to 2012 during the scandal, now heads the IRS Affordable Care Act Office. (She was Deputy Commissioner from 2004 to 2006, and Division Counsel/Associate Chief Counsel from 1999 to 2004.)
Considering her background, it’ll be interesting to see how she deals with implementing the new health care law in 2014.
In 2010, the Committee on Ways and Means Republican staff reported that IRS implementation of ACA could require up to 16,500 new agents over 10 years. While the figure was decried as inflated at the time, the IRS submitted a budget request for 1,954 full-time equivalent employees to handle ACA implementation in 2014 alone.
Back in 2011, Government Accounting Office published a report listing 47 new IRS responsibilities under the Affordable Care Act. Yet it is not clear that the IRS is ready for the challenge.
Here are six new IRS questions for 2014, all subject to murky interpretation.
What qualifies as health insurance?
Under the ACA, everyone has to have minimum essential coverage or else pay a tax. The IRS gets to decide what that minimum essential coverage is. Does your employer’s plan, or the plan you have purchased independently, constitute minimum essential coverage?
This is important because if your plan does not have "minimum essential coverage" you will have to pay the IRS a penalty. The cost of the new plans is likely to be so high, however, that some might find it worthwhile to pay the penalty and purchase a plan with less than "minimum essential coverage."
Some low-cost plans are prohibited in the exchanges. For instance, catastrophic health insurance plans, under which people are insured against major expenses and pay for routine costs out of pocket or with health savings accounts, are allowed to be sold only to those under 30. Some people might come out ahead paying the penalty and purchasing catastrophic health insurance.
Who has to pay the penalty, and how much?
Although the ACA is supposed to require everyone to have health insurance or pay a penalty, many people will not be subject to the penalty. Those below 100% of the poverty line, illegal immigrants, prisoners — they are all exempt. Also exempt are those who have certain religious beliefs, such as the Amish, or those who are born into a Native American tribe.
The IRS also gets to decide on the tax for not having health insurance. The penalty is $95 per person or 1% of adjusted gross income in 2014, $325 per person or 2% of AGI in 2015, and $695 or 2.5% of AGI in 2016 and thereafter.
Set insurance premiums
If you’re buying health insurance on one of the new state exchanges, which have to be set up by Oct. 1, the IRS will determine the level of your premiums.
The new health care bill will offer refundable, advance premium credits to singles and families with incomes between 133% and 400% of the federal poverty line. These credits can only be used to buy health insurance through the new health exchanges. The amount of the credits will be linked to the second lowest cost plan in the area, and are structured so that health insurance premium contributions are limited to the following percentages of income for specified income levels, as is shown in Table 2.
If you earn between 300% and 400% of the poverty line, premiums cannot be more than 9.5% of your income.
It doesn’t pay to be married under the ACA. Two singles would each be able to earn $45,000 and still receive help to purchase health insurance, but if they got married and combined their earnings to $90,000, they would be far above the limit. As a married couple, the most they could earn and still get government help with health insurance premiums is $62,040, a difference of almost $28,000, or 31%.
Marriage penalties exist even for those couples who earn below 400% of the poverty line when married. Two singles, living alone, each earning $22,980, would be at 200% of the federal poverty guideline. Unmarried, their premium would be about 6.3% of their income, or $1,448 each, $2,896 in total. If they were to marry, their combined income would be $45,960 — approximately 300% of the poverty line for a family of two. This would push their premium to $4,366 of their combined income.
Collect additional payments if you’ve underpaid your premiums
As complex as this system sounds, it gets harder. For people enrolling in the exchanges this October for 2014, the IRS only knows their income for 2012 — because that is what was reported on their tax return filed on April 15, 2013. But by 2014, they might have gotten married, divorced, lost their job, taken a lower-paying job, or received a raise — all of which would affect their premium.
When the IRS finally knows the individual’s 2014 income, the agency needs to adjust the premium owed to reflect these changes. That means people who make more will owe money to the IRS, and those who make less will receive reimbursements.
Figure out if you’re self-employed
The IRS has been spending a lot of time recently deciding whether workers are independent contractors — self-employed — or employees of a business. Under the ACA, the self-employed who purchase health insurance on the exchange will have an advantage in paying for premiums, because the premiums can be paid out of pre-tax income.
Someone who works for a firm which does not offer health insurance, and who earns above 400% of the poverty line, will have to buy insurance on the exchange. The IRS calculates that annual premiums for the cheapest family plan will be $20,000 for a family of five in 2016. If you’re self-employed, you can deduct the $20,000 from income before you pay taxes. Otherwise, premiums are nondeductible. Depending on income level and federal and state and local tax rates, premiums could cost as much as $40,000 in pre-tax income.
Collect employer penalties if firms don’t offer the right kind of insurance
The IRS will also be responsible for collecting penalties from employers if they don’t offer the right kind of insurance. These penalties are either $2,000 per worker above 49 workers, or $3,000, if someone in the firm gets subsidized coverage on one of the exchanges. The first 30 workers are exempt from the penalty, so moving from 49 to 50 workers could cost an employer $40,000 annually.
Penalties are not levied on part-time workers, defined as under 30 hours a week, so the IRS will have to examine who is working part-time, and over what period. What if an employee works 28 hours one week and 32 hours another week? The IRS will have to develop clear rules for whether that employee is part-time or full-time.
As Lord Acton wrote in 1887, "Power tends to corrupt, and absolute power corrupts absolutely." If Ingram cannot oversee tax-exempt status in a nonpartisan manner with her dozen years in the Tax-Exempt Division, concerns are building about whether she can fairly implement the Affordable Care Act.
This piece originally appeared in WSJ's MarketWatch
This piece originally appeared in WSJ's MarketWatch