Mid-year IRS report proves subsidies exceed penalties

You may not have heard of the Taxpayer Advocate Service, but it serves as “your voice at the IRS.” TAS is an independent organization within the IRS whose job is to protect your rights as a taxpayer and help you with tax problems you can’t resolve on your own.

National Taxpayer Advocate Nina Olson, who heads up the Taxpayer Advocate Service, issued her statutorily mandated mid-year report to Congress yesterday, which “identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year, including…administration of the Patient Protection and Affordable Care Act (ACA)” and “highlights of the recently concluded filing season.”

As dry as the report sounds, it’s worth taking a look at. In her preface to the report, Ms. Olson discusses the difficulty of serving “the overwhelming majority of taxpayers who are trying to comply with the tax laws” on a very limited budget. As she points out, “With funding down about 17 percent on an inflation-adjusted basis since FY 2010, and with the IRS having had to implement large portions of the Patient Protection and Affordable Care Act (ACA) and the Foreign Account Tax Compliance Act (FATCA) this year without any supplemental funding, sharp declines in taxpayer service were inevitable.”

The volume of support required is impressive: the IRS handles more than 100 million telephone calls, answers ten million letters, and assists more than five million taxpayers who visit IRS walk-in sites each year. That, as Ms. Olson points out, “requires considerable staffing.” For those worried about increased audits as a result of the Affordable Care Act, this report should make you feel a little more comfortable.

Still wanna skip the full report? Fine. Some of the high points are included below.

IRS Implementation Efforts Were Tested During Filing Season 2015

Eligible individual taxpayers claimed the PTC for the first time on TY 2014 returns filed during the 2015 filing season. The following figure provides information regarding the extent to which individual taxpayers claimed the PTC on their TY 2014 returns.

people claiming tax credit

Individual taxpayers who did not have minimum essential coverage or qualify for an exemption were required to make an ISRP on their TY 2014 returns. The following table provides data on the reporting of ISRPs on TY 2014 returns.

people paying tax penalty

A Significant Number of Taxpayers Overpaid the Individual Shared Responsibility Payment

  • More than 300,000 taxpayers overpaid their ISRP, totaling about $35 million through April 30, 2015.
  • Most of these taxpayers did not owe an ISRP because they were eligible for an exemption as a result of their low income.
  • The average ISRP overstatement amount was a little over $110 per return.
  • Due to the tax preparation fees associated with filing an amended return, many impacted taxpayers will not take the initiative to file a claim for a refund of the excess ISRP.

Final Thoughts

So why is this report important? For a couple reasons. First, it confirms that the amount of the penalties (an average of $190, including many who overpaid) is significantly less than the amount of the premium tax credits (an average of $3,000 per return). Second, it shows that the IRS is grossly understaffed, so the threat to people who fail to purchase health insurance is relatively low. For 2014, the IRS basically had to take people’s word for it if they said they had health insurance.

For brokers who sell individual health plans, the report clearly shows that they should focus on the premium tax credits, not the penalties, in their marketing efforts. The carrot in this case is much larger than the stick.

And because this stuff is very confusing (the number of errors on the part of both taxpayers and the IRS certainly seems to prove that), it may make sense for brokers to choose how they prefer spending their time – marketing and drumming up business or helping individuals one at a time with the tedious insurance enrollment and tax credit application process. For those who prefer the latter, there are plenty of brokers who would gladly send business your way. But if you instead prefer to spend your time identifying and educating prospective clients and then letting someone else do the detail work, you might want to consider investing in a private exchange website. The technology, paired with call center support from licensed agents, can help brokers spend their time more efficiently and make the most of the income opportunity presented by the Affordable Care Act.

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