FROM FORBES.COM
The healthcare.gov website continues to be a nightmare for those Americans trying to enroll and receive subsidized insurance. The law behind it all, the Patient Protection and Affordable Care Act, commonly known as Obamacare, is also causing millions of Americans to lose their current insurance (over 5 million so far). These unfortunate people had low-priced insurance plans with limited coverage, plans that do not meet the minimum requirements for insurance under Obamacare. There is only one group of people that appears set to win from Obamacare: tax fraudsters.
The main feature of Obamacare is a system of subsidies to make insurance affordable for people who earn too much to qualify for Medicaid and too little to afford market price insurance policies. The law also provides coverage for children under 26 on their parents’ insurance and people with pre-existing conditions can now buy insurance at more favorable premiums. However, the main mechanisms for expanding coverage are making people eligible for Medicaid or offering them subsidies.
People who earn slightly more than the poverty level and who were not previously eligible for Medicaid (either because of earning too much or because they are childless adults) will now get Medicaid, free federal government health insurance, if they live in a state that agreed to expand Medicaid to cover that group of people.
People who earn from 133 percent to 400 percent of the poverty line are eligible for subsidies when they purchase insurance policies through a state exchange. There are currently lawsuits over whether it is legal for the federal government to offer the subsidies to people who buy insurance from the federal exchange (the law never says they can). However, the Obama administration plans to offer the subsidies through the federal exchanges whether it is legal or not.
These issues are all fairly well known, but what has been much more sparsely reported is that the law is almost perfectly designed for tax fraud. This tax fraud, which will be at least somewhat legal, will happen in two stages.
First, the way the Obama administration is implementing the law allows people to state their income with little to no verification. By stating a low income, people can qualify for a large subsidy which gets paid in advance. When people receiving 2014 subsidies file their taxes in April 2015, if it turns out their income was higher than they originally stated, you might think they would then have to repay the subsidy.
But now we get to the second part of the tax fraud. Under the law it is not only difficult for the government to get its money back, in some cases it is legally impossible. There are two limits on the ability of the IRS to collect the overpayment.
The IRS is not allowed to place a lien on your property or garnish your wages in order to collect money owed under Obamacare. This applies to both overpayment of subsidies and to the penalty for not purchasing insurance at all. That means unless a person voluntarily pays what is owed the IRS can only collect money from people who would otherwise be owed a refund on their taxes. If someone owes money either for not purchasing insurance or overpayment of a subsidy, the IRS can deduct the amount owed from the refund the person would have received. If they are not owed a refund large enough to collect the entire amount, there is nothing more the IRS can do.
In addition to the above difficulties that the law places on the IRS, the law also limits the amount of any subsidy overpayment that must be repaid under any circumstances (look at the very end of the law in this link). In other words, if a person lies about their income in order to collect a larger subsidy, there is a good chance that they legally can keep at least some of the overpayment.
For example, for a family with actual income of less than 200 percent of the poverty line (around $47,000 for a family of four), the most that must be repaid is $600. If the family’s income is as high as $115,000, they still cannot be forced to repay more than $3,500.
Given that the Obamacare subsidies for a family of four can easily be $10,000 or more the difference between what is paid as an undeserved subsidy and the amount that must be repaid could be quite large.
Recent reports have described how the IRS has been paying $4 billion per year in fraudulent refunds filed by thieves who didn’t even do a particularly good job of disguising the fraud. The IRS was also found to have paid over $110 billion in fraudulent earned income tax credits over a decade. Thus, tax fraud is a major problem already and Obamacare seems almost to be intentionally designed to make tax fraud easy.
There is little that can be done to tighten up the income verification in an effort to prevent overpayment of subsidies to begin with. For one thing, the Obama administration does not want to verify incomes because they want people to get big subsidies and because it would slow the process down even more (if that is possible). Beyond that, the entire income verification problem is very complex. The IRS only has full income data for the last tax return filed, which is one year old. Using that, they must try to determine the family’s likely income in the coming year. Over a two year period, incomes can change a lot, so over- and under-payment of subsidies is unavoidable.
Worries about tax fraud related to the Obamacare subsidies caused Senators Hatch and Coburn to send a letter to the IRS last week asking about their plans to minimize such fraud. My guess is the answer will be nothing because the law does not really allow the IRS to stop the fraud.
Obamacare is going to be one of the largest government programs we have as measured by spending, with most of the spending occurring through the subsidies designed to make insurance affordable. Yet the program is designed in a manner that invites tax fraud on a massive scale. Just understate your income, arrange your withholding so you are not due a refund, and keep your subsidy overpayment with no fear of reprisal.
Given that an entire industry has grown up helping people commit tax fraud using the earned income tax credit, we should expect a similar phenomenon to arise around the Obamacare subsidies. If the IRS cannot minimize fraud when they have the full range of their enforcement powers, how bad is the fraud going to be when the IRS has both hands tied behind its back?
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