Thanks to commenter Sancho for alerting me to the following post, by Sarah Kliff, at the Washington Post’s Wonkblog (via Reading is for Snobs). It had me chuckling all the way to the bottle-o and back on this dreary, rainy Melbourne morning:
Readers ask, we answer! What happens if you don’t pay Obamacare’s tax penalty?
Gene is a self-employed New Yorker who currently purchases his own health insurance. He also is a strong opponent of Obamacare. And starting next year, Gene plans to drop his health coverage in express protest of the health law’s mandate.
“I will cancel my insurance the instant I can no longer be denied insurance for preexisting conditions,” Gene wrote in an e-mail Sunday night. “I will not fill out the special IRS form.”
Gene asked that I not use his last name as he’s talking specifically about disobeying a federal mandate…
“I am especially interested to know what happens, if anything, when my 2013 federal tax return does not include the Obamacare form and when I refuse to comply with any request to produce one?” Gene asked in his e-mail. “Am I correct that if I do not provide the form, there is nothing the IRS can do to me? And if they can do something to me, what is it that they can do?”
To answer these questions, I called up Catherine Livingston. Up until January, she was the health-care counsel in the Internal Revenue Services’s Office of Chief Counsel. She now works as a partner at the law firm Jones Day.
The first thing I asked her was what happens if you don’t send in a form that specifies whether you do or don’t have insurance coverage. That, she told me, isn’t actually clear yet.
I’ll skip over the intricacies of US tax accounting and tax law that follow. What’s interesting to me in this post is Gene’s cunning little plan to avoid paying the $95 tax penalty he might incur by dropping his health coverage:
…In 2014, the health law includes a $95 penalty for not carrying health insurance. This penalty is administered by the Internal Revenue Service through the tax return system. In order to collect, the IRS will typically dock that amount from an individual’s tax return.
Gene has, however, already thought this issue through. He plans to adjust his “quarterly estimated payments to ensure I do not have a tax refund, which I understand to be the only source from which the IRS can extract any penalties that I refuse to pay voluntarily.”
This, Livingston said, is actually a strategy that might just work. For that to happen, the tax filer would need to be cognizant of the estimated tax penalty, which the IRS can levy against filers that pay far too few taxes. But keeping that in mind, dodging a refund could mean dodging the mandate fine.
“The needle you would have to thread to execute this is making sure you’ve paid enough taxes to avoid the estimated tax penalty,” Livingston said, “But not so much that you would get a refund.”
Let’s assume that Gene’s objection to Obamacare is so strong that he’s actually prepared to drop his health coverage and make a special effort every quarter to ensure that he doesn’t qualify for a tax refund, thus avoiding the $95 penalty for not carrying health insurance. What is he actually doing?
First, of course, he’s leaving himself dependent on public health care if he should suffer a major illness or injury. Or exposed to bankruptcy if he seeks private treatment of such a major illness or injury. But maybe he considers those acceptable risks. Now let’s consider the effect of this plan on his finances.
Suppose, that while Gene is preparing his tax return he discovers that he’s due a refund of exactly $95. He carries out his cunning little plan and adjusts his return to ‘dodge’ his refund. Has he dodged the $95 tax penalty? Of course not – he’s merely saved the US Internal Revenue Service a bit of paperwork.
But what if Gene’s refund is considerably more than $95 – say $200? Once again, he carries out his cunning little plan and adjusts his return to ‘dodge’ the refund. Now his efforts to dodge the $95 tax penalty have cost him an additional $105. In protest against – to his mind – an unfair tax impost he’s actually paying more tax than he has to. And voluntarily to boot.
There’s a well known phrase to describe this sort of behaviour. Something about ‘Cutting off your nose…’. Gene’s plan is so cunning you could stick a handle on it and call it a hammer.