Tuesday, August 18, 2009

IRS Could Become Health Insurance Watchdog

This would be similar to MA's mandatory health insurance program where the MA Department of Revenue is the watchdog. Health insurance companies in MA are required to send the insured a Form 1099 with a code indicating the taxpayer has adequate insurance coverage. The taxpayer is required to include that code in his tax return proving that he has adequate health insurance coverage.

By Michael Cohn
August 17, 2009

The IRS will bear responsibility in making sure that taxpayers have health insurance, and taxing them if they don’t, if some provisions in the legislation now in Congress go through in their present form.

An interesting blog post on a site called Hot Air describes some of the requirements in both the House and Senate HELP Committee versions of the legislation, both of which of course are still a work in progress. However, as the author (identified only as “Legal Insurrection”) points out, there has been relatively little attention given to the IRS’s role in implementing health care reform so far. In the Senate version of the bill, anybody who provides health coverage for another person would have to file a return with the IRS listing the names, addresses, Social Security numbers and coverage period for each person.

In the House version, they would have to furnish the name, address, and taxpayer identification number of the primary insured person, the name of each individual covered under the policy, and the period under which each person was provided coverage. Both versions of the bill allow the Secretary of Health and Human Services to add other reporting requirements.

If a person does not have acceptable health insurance coverage at any time during the tax year, a tax would be imposed under the House bill equal to 2.5 percent of either the taxpayer’s modified adjusted gross income or the gross income specified under Section 6012(a)(1) of the Tax Code. The Senate version has some differences, including calling the tax a “shared responsibility payment” and giving people a month to go without insurance, with some exemptions allowed.

Presumably the IRS would be able to cross-check income tax returns with health coverage filings and withhold income tax refunds if people cannot prove they have acceptable health coverage, either from an employer or some other source. Effectively the legislation could allow the IRS to get involved in reviewing the health care and coverage information of taxpayers and their dependents for the first time, raising some privacy concerns.

This begs the question of how the IRS is going to determine that someone’s health insurance coverage is adequate or appropriate. For many uninsured people who are forced to buy health insurance or face penalties unless they qualify for subsidies or Medicaid, chances are they’re going to opt for bargain basement coverage that will provide them with some form of insurance for the lowest cost possible. It will be interesting to see how all this plays out and what kind of guidance the IRS would provide if the health reform bill passes, which lately has been looking less and less certain.

Are we going to see traditional insurers and fly-by-night companies rushing out ultra-cheap plans that promise much, but deliver little, in order to allow people to meet the minimum coverage requirements, or are the so-called “public option” or the murky “insurance cooperatives” going to somehow fill the gap? Maybe one day insurance fraud will become a form of tax fraud, even if it’s just to claim one has insurance when the insurance is either fictitious or inadequate in the event of a major medical expense.