Tuesday, August 25, 2009

Tax Treatment Under Obamacare Examined

One of the primary ways that health care will be overhauled is through adjusting the tax code - the Internal Revenue Code. It's one of the reasons that the House Ways and Means Committee had to go through the bill.

Tremendous amounts of revenue are needed to make President Obama's plans a reality, and the tax code has to be adjusted in ways large and small to make it happen.

Those businesses would be hit with $100 per day per employee until they come into compliance.
Employers who elect to provide coverage but whose health benefit plans fail to meet the proposal’s minimum health coverage participation requirement are subject to an excise tax of $100 per day for each employee to whom the failure applies.30 The excise tax does not apply to (1) periods during which an employer used reasonable diligence but did not discover any failures, and (2) failures that are corrected within 30 days of discovery (but only if such failures are due to reasonable cause and not willful neglect). Excise taxes imposed on employers for unintentional failures (i.e., due to reasonable cause and not to willful neglect) are limited to the lesser of: 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for group health plans, or $500,000. There are parallel civil penalties provided in ERISA and PHSA.31 The excise tax with respect to any failure is reduced (but not below zero) by the amount of any civil penalty collected under these parallel provisions.
This would take effect for taxable years beginning after 2012.

So, if a company provides coverage, but not coverage meeting the levels set by the federal government, they'd be whacked by the IRS until they do.

Add to that harsher penalties imposed for inaccurate returns, particularly where the IRS determines that a transaction lacks economic substance. The IRS would have no leeway in penalties - it's strict liability if you screw up on your tax returns. That's primarily because penalties is a big way to raise revenue.

James Peaslee, writing in the WSJ tackles the penalty provisions:
Under current law, taxpayers who lose an argument with the IRS can generally avoid penalties by showing they tried in good faith to comply with the tax law. In a broad range of circumstances, the health-care bill would change the law to impose strict liability penalties for income-tax underpayments, meaning that taxpayers will no longer have the luxury of making an honest mistake. The ability of even the IRS to waive penalties in sympathetic cases would be sharply curtailed.

The proposed changes in penalty rules have largely escaped notice because they are buried in a part of the bill that purports to deal with abusive tax shelters. They are barely mentioned in the Ways and Means Committee summary. Their inclusion in the bill underscores the need to read it closely. If anyone had doubts about the value of loading the text of the bill into a wheelbarrow and bringing it to the beach this August, the proposed changes to tax penalties should dispel them.

Recent experience shows that Congress needs to be careful about imposing no-fault penalties. In 2004, Congress adopted very large automatic penalties for failures of taxpayers to attach a tax-shelter reporting form to their tax returns. While penalties make sense where a taxpayer deliberately fails to file a return, the approach here was too unforgiving.
That's in addition to the surtax that Democrats hope to impose on high-income earners. The tax would be a significant hit on taxpayers - a combination of a new 5.4% surtax and an expiration of the Bush-era tax cuts (allowing the reduced rates to expire for tax years after 2010, meaning the rates revert to the prior rates).

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