Health care reform law’s impact on IRS is uncertain

One of the most contentious aspects of the health care reform law signed by President Obama on March 23 was the requirement that all Americans obtain health insurance that provides "minimum essential coverage," whether or not they want it.

Because the Patient Protection and Affordable Care Act requires the Internal Revenue Service to enforce compliance, critics say it will result in a significant expansion of the tax collection agency.

Republicans on the House Ways and Means Committee estimated in a March report the IRS could require as many as 16,500 additional examiners, agents and other employees to implement the law.

But IRS Commissioner Douglas Shulman said, "It's way too early to say exactly what we're going to need three or four years from now for the actual full implementation." In remarks following a speech at the National Press Club in Washington on April 5, Shulman said new processes and technology could negate the need for substantial staff increases.

"None of the individual tax provisions come into play this year," he said. "This is all down the road, most of them coming into play for 2013 and 2014."

What's more, the agency is limited in the actions it can take to enforce compliance. "Congress was very careful to make sure that there was nothing too punitive in this bill," Shulman said. "There's no criminal sanctions for not paying this, and there's no ability to levy a bank account or do seizures or [use] some of the other tools" available to the agency for enforcing laws.

Shulman said he isn't particularly worried that taxpayers will view limited penalties as an invitation to flout the mandate. "The vast majority of American people have a healthy respect for the law and want to be compliant with their tax obligations and whatever else the law holds," he said. If necessary, the IRS will levy fines against individuals who fail to purchase adequate insurance and collect them though tax return offsets. But the agency's "first line of defense is education," he said.

There's support for that approach in an extensive study of the administrative aspects of health reform conducted by the National Academy of Public Administration and the National Academy of Social Insurance last summer. Panelists found that emphasis should be on encouraging compliance rather than on penalizing noncompliance, and that penalties should be both moderate and collectable.

"Among the more administrable types of arrangements are denying tax benefits or government transfer payments to individuals who do not buy insurance and a play-or-pay mandate that requires employers to pay a contribution or tax when they do not pay toward an employee's insurance," the report said.

The controversy over health reform didn't end when President Obama signed the law. So far, 18 states have joined a lawsuit filed on March 23 challenging the constitutionality of the law's requirement that individuals purchase health insurance. While the eventual outcome of that suit is uncertain, the IRS already has begun implementing other aspects of the law, including tax credit provisions for small businesses to help them buy insurance for employees and new taxes on some parts of the health care industry.

"The IRS tries to stay out of the political fray," Shulman said.