How ObamaCare Makes the IRS Even More Powerful
If you think the Internal Revenue Service is too powerful, wait another year or so and see how you like the agency then. In the coming years, the federal tax collector will have the primary responsibility for determining who is eligible for Obama-Care’s exchange subsidies, verifying whether individuals carry health insurance that fulfills the law’s individual mandate, and applying the appropriate tax penalty to those who do not have qualifying insurance. While the Department of Health and Human Services has said it would not bother verifying income this year, the law’s requirements haven’t changed. So the IRS’s powers will remain—unless, of course, the Obama administration continues to try to rewrite the law through executive fiat.
The IRS, of course, has been much in the news lately. It is the same agency that subjected non-profits with “Tea Party” and “Patriot” in the names to onerous and invasive information demands as part of its review of the groups’ applications for tax-exempt status. That was the conclusion of the Department of the Treasury’s Inspector General for Tax Administration, and it was that conclusion that led the agency itself to apologize, led the President to fire acting IRS administrator Steven Miller, and prompted a Justice Department investigation.
A few examples of how the IRS treated these nonprofits:
• Kevin Kookogey wanted to teach young students about the ideas of Alexis de Tocqueville and Cicero. The IRS said he had to hand over the names of the kids he wanted to teach and the names of any instructors he hired before it would grant his group, Linchpins of Liberty, tax-exempt status.
• Marion Bower started the group American Patriots Against Government Excess in Fremont, Ohio, in order to promote awareness about the growth and power of government. IRS gave her its own lesson when the agency demanded a synopsis of every book the group discussed at its meetings before it would grant tax-exempt status.
• Donors to the National Organization for Marriage (NOM) believe, as a matter of conscience, that marriage should not be defined as anything other than a union between one man and one woman. For those beliefs, they were harassed, assaulted, and had their property vandalized after someone illegally leaked IRS documents revealing their names to a group that supports same-sex marriage. The Justice Department then cited taxpayer privacy laws as the reason it could not provide NOM with any information on the results of its investigation of the leaks.
At least 25 Tea Party groups, many represented by the American Center for Law and Justice, are now suing the IRS. But they’re not the only ones. Thanks to a report from Courthouse News Service, we also know that an unnamed company in California is suing the IRS for allegedly seizing without warrant 60 million health records of 10 million Californians. And that brings us to the question of how much more power the IRS will have in the health care field in the coming years. Below, we present a brief summary of the ways that ObamaCare increases IRS power, followed by a listing of the “46 New ObamaCare Powers of the Internal Revenue Service.” —Editor
The Tax Man Becomes the ObamaCare Enforcer
At Least 42 New Powers
ObamaCare contains what the Treasury’s inspector general calls “the largest set of tax law changes in 20 years.” ObamaCare is so complex that auditors cannot agree on how many provisions the Internal Revenue Service is charged with implementing. The GAO wrote that the IRS “has responsibilities in the implementation of 47” provisions, while the Treasury inspector general concluded that “at least 42 provisions [of ObamaCare] add to or amend the Internal Revenue Code.” (One of the powers in the GAO’s list has since been repealed. See “46 New ObamaCare Powers of the Internal Revenue Service, page 15.)
The law’s massive changes led Nina Olson, the National Taxpayer Advocate at the IRS, to worry in 2010—well before the current scandal became public—that she was “concerned about [the IRS’s] ability to administer the new health care credits and penalty taxes in a fair and compassionate way.”
Getting Your Information
ObamaCare requires all insurance companies to report to the IRS the name, address, identification number, and type of policy purchased by every customer, along with a determination whether the insurance was government-approved for purposes of complying with ObamaCare’s individual mandate. Likewise, individuals will have to file similar forms demonstrating they held government-approved insurance with their tax returns.
Trillions in New Taxes
ObamaCare contains no fewer than 18 tax increases, including new taxes on medical devices, insurers, and pharmaceutical companies. According to the most recent estimates from the Congressional Budget Office, those tax increases will raise revenue by at least $1 trillion over the next 10 years—followed by higher sums in future decades.
Moreover, 12 of the 20 tax increases will affect middle-class families, directly violating President Barack Obama’s “firm pledge” that he would not raise taxes on families making under $250,000 per year.
A Gusher of Spending and Bureaucrats
To implement all of ObamaCare’s tax increases, the IRS has needed additional infusions of taxpayer funds. The Government Accountability Office estimates that the IRS will spend $881 million implementing the law from 2010 through 2013 and that, of that amount, the IRS would spend more than half a billion dollars from an ObamaCare implementation “slush fund.”
Treasury Secretary Jack Lew recently told Congress that the IRS had approximately 700 full-time equivalent staff working on ObamaCare implementation. However, in its budget request this spring, the IRS assumed that a force nearly three times that size—1,954 full-time equivalent employees—will work on the law’s implementation in the coming fiscal year.
Mr. Jacobs is Senior Policy Analyst in the Center for Health Policy Studies at The Heritage Foundation. This article is an adapted version of an article originally published May 16, 2013, by The Heritage Foundation.
46 New ObamaCare Powers of the Internal Revenue Service
1. Charitable hospital tax: Imposes additional reporting requirements for charitable hospitals to qualify as tax-exempt under Internal Revenue Code 501(c)(3) and requires hospitals to conduct a community health needs assessment at least once every three years and to adopt a financial assistance policy and policy relating to emergency medical care.
2. Codification of the “economic substance doctrine”: Clarifies and enhances the applications of the economic substance doctrine and imposes penalties for underpayments attributable to transactions lacking economic substance.
3. “Black liquor” tax hike: Amends the cellulosic biofuel producer credit (nonrefundable tax credit of about $1.01 for each gallon of qualified fuel production of the producer) to exclude fuels with significant water, sediment, or ash content (such as black liquor).
4. Tax on innovator drug companies: Imposes a fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs.
5. Blue Cross/Blue Shield tax hike: Limits eligibility for deductions under section 833 (treatment of Blue Cross and Blue Shield) unless the organizations meet a medical-loss ratio standard of at least 85 percent for the taxable year.
6. Tax on indoor tanning services: Imposes a tax on any indoor tanning service equal to 10 percent of amount paid for service.
7. Medicine cabinet tax: Repeals the tax exclusion for over-the-counter medicines under a health flexible spending arrangement (FSA), health reimbursement arrangement (HRA), health savings account (HSA), or Archer medical savings account (MSA), unless the medicine is prescribed by a physician.
8. Health savings account withdrawal tax hike: Increases tax on distributions from HSAs and Archer MSAs not used for medical expenses.
9. Employer reporting of insurance on W-2: Requires employers to disclose the value of the employee’s health insurance coverage sponsored by the employer on the annual Form W-2.
10. Surtax on investment income: Imposes an unearned income Medicare contribution tax of 3.8 percent on individuals, estates, and trusts on the lesser of net investment income or the excess of modified adjusted gross income (AGI + foreign earned income) over a threshold of $200,000 (individual) or $250,000 (joint).
11. Hike in Medicare payroll tax: Imposes an additional Hospital Insurance (Medicare) tax of 0.9 percent on wages over $200,000 for individuals and over $250,000 for couples filing jointly.
12. Tax on medical device manufacturers: Imposes a tax of 2.3 percent on the sale price of any taxable medical device on the manufacturer, producer, or importer.
13. High medical bills tax: Increases the threshold for the itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income to 10 percent of adjusted gross assets (unless the taxpayer turns 65 during 2013–2016 and then the threshold remains at 7.5 percent).
14. Flexible spending account cap: Limits health FSAs under cafeteria plans to a maximum of $2,500 adjusted for inflation.
15. Retiree prescription drug coverage tax hike: Allows the deduction for retiree prescription drug expenses only after the deduction amount is reduced by the amount of the excludable subsidy payments received.
16. Compensation limit: Denies the business expenses deductions for wage payments made to individuals for services performed for certain health insurance providers if the payment exceeds $500,000.
17. Patient-Center Outcomes Research Institute fee: Imposes a fee through 2019 on specified health insurance policies and applicable self-insured health plans to fund the Patient-Centered Outcomes Research Trust Fund to be used for comparative effectiveness research.
18. Individual mandate tax: Requires all U.S. citizens and legal residents and their dependents to maintain minimum essential insurance coverage unless exempted starting in 2014 and imposes a fine on those failing to maintain such coverage.
19. Employer mandate tax: Imposes a penalty on large employers who (1) do not offer coverage for all of their full-time employees, offer unaffordable minimum essential coverage, or offer plans with high out-of-pocket costs and (2) have at least one full-time employee certified as having purchased health insurance through a state exchange and was eligible for a tax credit or subsidy.
20. Tax on health insurers: Imposes an annual fee on any entity that provides health insurance for any U.S. health risk with net premiums written during the calendar year that exceed $25 million.
21. Excise tax on health insurance: Imposes a 40 percent excise tax on high cost employer-sponsored health insurance coverage on the aggregate value of certain benefits that exceeds the threshold amount.
22. Early retiree subsidy: Establishes a temporary reinsurance program to provide reimbursement for a portion of the cost of providing health insurance coverage to early retirees.
23. Nonprofit tax exemption: Provides tax exemption for nonprofit health insurance companies receiving federal start-up grants or loans to provide insurance to individuals and small groups.
24. Reinsurance tax exemption: Provides tax exemption for entities providing reinsurance for individual policies during first three years of state exchanges.
25. State exchange tax credit: Provides premium assistance refundable tax credits for applicable taxpayers who purchase insurance through a state exchange, paid directly to the insurance plans monthly, or to individuals who pay out-of-pocket at the end of the taxable year.
26. Cost-sharing subsidy: Provides a cost-sharing subsidy for applicable taxpayers to reduce annual out-of-pocket deductibles.
27. Small business tax credit: Provides nonrefundable tax credits for qualified small employers (no more than 25 full-time equivalent employees with annual wages averaging no more than $50,000) for contributions made on behalf of its employees for premiums for qualified health plans.
28. Small business tax exclusion: Offers tax exclusion for reimbursement of premiums for small-group exchange participating health plans offered by small employers to all full-time employees as part of a cafeteria plan.
29. Indian tribe tax exclusion: Allows an exclusion from gross income for the value of specified Indian tribe health care benefits.
30. Therapeutic discovery tax credit: Establishes a 50 percent nonrefundable investment tax credit for qualified therapeutic discovery projects.
31. Adoption tax credit: Increases the maximum adoption tax credit and the maximum exclusion for employer-provided adoption assistance for 2010 and 2011 to $13,170 per eligible child.
32. Tax exclusion for dependent coverage: Extends the exclusion from gross income for reimbursements for medical expenses under an employer-provided accident or health plan to employees’ children under age 27.
33. Advance tax credit and cost-sharing reductions: Allows advance determinations and payment of premium tax credits and cost-sharing reductions.
34. Health care services loan tax exemption: Excludes from gross income amounts received by a taxpayer under any state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas.
35. State exchange information reporting: Requires state exchanges to send to Treasury a list of the individuals exempt from having minimum essential coverage, those eligible for the premium assistance tax credit, and those who notified the exchange of change in employer or who ceased coverage of a qualified health plan.
36. Exchange participation requirement: Outlines the procedures for determining eligibility for exchange participation, premium tax credits and reduced cost-sharing, and individual responsibility exemptions.
37. Taxpayer information disclosure: Authorizes IRS to disclose certain taxpayer information to the Department of Health and Human Services for purposes of determining eligibility for premium tax credit, cost-sharing subsidy, or state programs including Medicaid, including taxpayer identity; the filing status of such taxpayer; the modified adjusted gross income of taxpayer, spouse, or dependents; and tax year of information.
38. Insurance provider information reporting: Requires every person who provides minimum essential coverage to file an information return with the insured individuals and with IRS.
39. Large employer information reporting: Requires information reporting of health insurance coverage information by large employers and certain other employers.
40. Medicare beneficiary information disclosure: Authorizes IRS to disclose certain taxpayer information to the Social Security Administration regarding reduction in the subsidy for Medicare Part D for high-income beneficiaries.
41. Health plan penalty: Imposes a penalty on health plans identified in an annual HHS penalty fee report, which is to be collected by the Financial Management Service after notice by the Department of the Treasury.
42. New group plan penalty: Subjects new group health plans to certain Public Health Service Act requirements and imposes the excise tax on plans that fail to meet those requirements.
43. Group plan compensation discrimination prohibition: Prohibits group health plans from discriminating in favor of highly compensated individuals.
44. Nonprofit indicator system: Requires the independent institute partnering with the National Academy of Sciences to implement a key national indicator system to be a nonprofit entity under section 501(c)(3).
45. Small business exemption for cafeteria plans: Allows small businesses to offer simple cafeteria plans—plans that increase employees’ health benefit options without the nondiscrimination requirements of regular cafeteria plans.
46. Corporate tax advance: Increases the required payment of corporate estimated tax due in the third quarter of 2014 by 15.75 percent for corporations with more than $1 billion in assets, and reduces the next payment due by the same amount.
Compiled by Ryan Ellis, Tax Policy Director at Americans for Tax Reform. This compilation was originally published by the Galen Institute at Galen.org, and is based on the Government Accountability Office report “Patient Protection and Affordable Care Act: IRS Should Expand Its Strategic Approach to Implementation,” June 2011.