Penalty Abatement and Obamacare –Do You Pay the Penalty if You do Not have Health Insurance?

Obamacare will not be repealed outright. The public will not politically stand for it. President Trump may end the insurance requirement through Executive Order which will, however, render the law toothless and unenforceable.

The IRS has announced that it will no longer require taxpayers to fill out the Obamacare line 61 on tax forms. This line asks whether a taxpayer has health insurance throughout the year. It penalizes a taxpayer if they do not. The line was added to tax forms to enforce the individual mandate. Under the health care law, the IRS the last two years has rejected a tax return if line 61 was left 61 was left empty. The IRS now says it will process returns regardless of the health insurance line.

Congressional Republicans have been pushing for years for either repeal and/or replacement of the Affordable Care Act aka Obamacare. Trump considers Obamacare a “disaster.” Congressional leaders, small business proponents, and Trump consider the Individual Mandate an affront in spite of the fact the Supreme Court, in a close split decision, upholding the provision two years ago.

While President Trump during his campaign promised to repeal the law, there has been little legislative action in his first few weeks in office. KellyAnne Conway, a top adviser to the president stated, “We are doing away with the Obamacare penalty. This tax has been such a burden on many Americans. It’s also been a burden on many small business owners, many of whom complained to us that the Obamacare penalty, along with so many other draconian regulations, are just a stranglehold.”

An executive order President Trump signed the first day in office may end being the silent killer of the health care law. The law told agencies to lessen, “the economic and regulatory burden of Obamacare.” The IRS has complied. The IRS announced its new policy of not requiring line 61 on February 15 and the IRS says it has started implementing this policy for all returns filed this year. This most recent action of the IRS will have the large and important impact of the healthcare law to continue, as there will be no enforcement of Americans to have insurance. Last year, a taxpayer could face a penalty of up to $695 or two and half percent of household income.

Although the IRS has stopped enforcing the tax form reporting requirement, Obamacare is still legislatively in effect. Taxpayers are required to obey the law and pay what they may owe. The IRS position is, “Legislative provisions of the ACA law are in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe.” The Agency says that while silent returns without line 61 won’t automatically be rejected, they may eventually be questioned by the agency and penalty assessed. The risk may be real that a taxpayer will face subsequent collection activity to recoup the individual shared responsibility payment.

Under the new IRS policy would had been a mandatory disclosure policy has become a more lenient voluntary one. Essentially, there has been a weakening of Affordable Health Care enforcement mechanism. Repeal is politically unacceptable, but the new Administration has taken subtle steps to weaken the law . . . it has kicked the leg out from the stool that supports the law.

Confusion over Republican plans to repeal the Affordable Care Act has roiled the health insurance market place. Humana, which covers 150,000 ACA customers in 11 states, has stated it is pulling out of the market entirely next year. Aetna which has reduced its customer base from 960,000 in 2016 to 240,000 this year has stated it may pull out of the market place entirely. While the ACA is not being repealed, it is becoming more like a suggestion than an individual mandate. But how aggressively will the Trump Administration seek Obamacare penalties from those who do not have health insurance or do not disclose that fact on line 61 of their tax returns?

When the IRS has questions about a return, the IRS follows up with correspondence after the filing process is completed. If there was ever a red flag on a tax return, it would be leaving line 61 blank on a 1040. Taxpayers can absolutely expect a computer generated letter from the Service Center if the line is left blank.

Enforcement of the collection of the ACA penalty, however, is not the same as other taxes. The ACA is very clear that taxpayers who do not pay the penalty are not subject to levies, liens or criminal prosecution. What the IRS can do is seize your refunds, just as it does for student loan debt. In the case of most people, the penalty will be less than this year’s refund. However, if the IRS cannot collect the penalty this year, the amount that is not collected is carried forward and will be recovered from refunds in future years.

The individual mandate is one of the more unpopular aspects of the health care law. It remains to be seen what incentives will evolve to enroll taxpayers for health care coverage while they are healthy.

If a taxpayer owes both income tax and a shared responsibility payment, may the taxpayer apply a partial payment to the income tax. The answer is ‘Yes.’ However a taxpayer designates the payments on a check, the IRS must honor. In the case of an undesignated payment, if there is older shared responsibility payment, the IRS will apply the payment to the oldest debt, the penalty.

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