The Internal Revenue Service probably will bark at you if you fail to obtain health insurance next year, but the agency won’t have much bite. On this issue, Congress pulled the watchdog’s

Story Highlights

• IRS could deduct penalty from tax refunds

• For those who aren’t owed a refund, the IRS options are limited

• Penalty in 2014 is $95 or 1 percent of person’s income

The Internal Revenue Service probably will bark at you if you fail to obtain health insurance next year, but the agency won’t have much bite. On this issue, Congress pulled the watchdog’s teeth. The Affordable Care Act declares that most Americans will face a penalty if they’re uninsured, starting in 2014. But experts predict the government will have a tough time forcing people to pay up. The IRS could deduct the penalty amount from any tax refund you’re due. But what if you’re not due a tax refund? “They might send you a sternly worded letter,” said Andy Grewal, a “University of Iowa law professor who specializes in tax issues. And if you toss the IRS’ hectoring note into the recycling bin, you should brace yourself for another sternly worded letter.

Much has been made about the fact that the penalty for failing to obtain health insurance next year is set at just $95 or 1 percent of a person’s income. That amount is set to rise substantially in subsequent years, but it will remain less than the premiums on many insurance policies. However, relatively few people know that the Affordable Care Act hamstrings the government’s ability to collect the penalties. The IRS, which is in charge of enforcing compliance with the new insurance requirement, is accustomed to carrying big sticks. The first step it usually takes against tax scofflaws is to file public liens against them. Such a lien means the IRS has first dibs on any money you acquire, Grewal said. “It puts a cloud over all your assets,” he said. “If there’s a public record that the IRS is after you, no one’s going to lend you money.” That means no mortgage, no car loan, no credit cards — until you settle up with Uncle Sam. Grewal said liens are usually enough to bring tax deadbeats to heel. If not, the IRS can seize assets, including your car or your house. And in extreme cases, if you willfully refuse to pay taxes, authorities can charge you criminally, put you on trial and send you to prison.

But when it passed the Affordable Care Act in 2010, Congress banned the IRS from using any of its usual techniques to force people to pay the penalty for failing to obtain health insurance. Alice Helle, a Des Moines lawyer who has been working on Affordable Care Act issues, speculated that members of Congress had political motives for disarming the IRS on this issue.

“I think they thought, ‘We’re not going to throw people in jail or put a lien on their house for not having coverage,'” she said. Helle doubts many Americans will decide to demonstrate displeasure with the Affordable Care Act by purposely refusing to have health insurance and then daring the IRS to try to punish them. “I’m guessing that most people who are adamantly opposed to it have coverage, so it’s really not an issue for them,” she said.

Proponents of the law say most Americans want health insurance, and they note that people with low to moderate incomes will be offered significant public subsidies to help pay the premiums. Sidney Watson, a St. Louis University health law professor, said researchers have found few people who prefer to be uninsured. “When we ask people, ‘Why don’t you have health insurance?’ people say, ‘Because I can’t find good insurance I can afford.'” If the Affordable Care Act can address such concerns, she said, there shouldn’t be many scofflaws. Watson pointed to the experience of Massachusetts. When that state implemented a similar health insurance requirement in 2006, older, sicker people were among the first to sign up. The most reluctant residents included many young, healthy men, who tend to be the least worried about insurance. But the prospect of subsidized insurance, along with the specter of a penalty for people who failed to comply, seemed to do the trick for Massachusetts.

“What they saw was right before the deadline, there was a big rush of people signing up, and the demographic was young men,” she said. Massachusetts’ penalty also was hard to enforce, she said. “It was meant to be more of a nudge.” Massachusetts now has the country’s lowest rate of uninsured residents, at 4 percent.

Note on extension [Dr. Goedde’s comments]

At the time this is written the sign-up time to avoid paying a penalty for not having health insurance has been extended through March 31, 2014. There is legislation pending in Congress to extend the deadline to January 1, 2015, as it was for businesses.

By Tony Leys, The Des Moines Register, October 29, 2013 Edited and posted by Harold Goedde CPA, CMA, Ph.D. (accounting and taxation)