Health-care law may pose compliance issues for IRS, taxpayers

By David S. Hilzenrath
Friday, July 9, 2010

The new federal health-care law may pose compliance challenges for taxpayers and the Internal Revenue Service, an IRS ombudsman said.

The agency, which will be responsible for administering major aspects of health insurance finance, is neither structured nor funded to effectively oversee social programs, the National Taxpayer Advocate Service said Wednesday in a news release.

In addition, a tax reporting requirement in the health-care law "may impose significant burdens on businesses, charities and government agencies," the advocate service said.

Those burdens "may turn out to be disproportionate as compared with any resulting improvement in tax compliance," the head of the service, Nina E. Olson, said in the release. The advocate service is an independent organization in the IRS that helps taxpayers solve problems with the agency and recommends reforms.

Although the IRS's main mission is to collect taxes, it has been given a key role administering health insurance premium subsidies, tax credits for small businesses, assessments on employers and the mandate that beginning in 2014, everyone must obtain insurance.

"I have no doubt the IRS is capable of administering social programs, including health care," Olson said. "But Congress must provide sufficient funding and the IRS itself must recognize that the skills and training required to administer social benefit programs are very different from the skills and training that employees of an enforcement agency typically possess."

The tension between enforcement and social service missions could affect the IRS's ability to administer health-care credits and penalties "in a fair and compassionate way," Olson said.

The comments accompanied Olson's routine midyear report to Congress.

Beginning in 2012, the health-care legislation enacted in March will require all businesses and tax-exempt organizations to issue an IRS form called a 1099 to vendors from whom they buy goods totaling $600 or more annually. That will require thorough record-keeping.

"For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases," the IRS release said.

Previously, such disclosures were required for the purchases of services but not goods.

The Taxpayer Advocate Service estimated the new requirement will affect 40 million businesses and other entities. Those include about 26 million sole proprietorships, not counting farms.

The IRS "will face challenges making productive use of this new volume of information," the midyear report said. "In our view, it is highly likely that the IRS will improperly assess penalties that it must abate later, after great expenditure of taxpayer and IRS time and effort."

The requirement could bury the IRS in tens of millions of paper filings that it will have to pay employees to process or disregard, Olson said through a spokesman.

The requirement was intended to help pay for the health-care legislation. By increasing compliance with the tax code, it is projected to raise $17.1 billion over 10 years, according to Congress's Joint Committee on Taxation. That does not include the IRS's administrative costs.

Under an IRS proposal, many purchases made with credit or debit cards would be exempt from the requirement because the IRS obtains information about them through other channels, the IRS has said.

The IRS is trying to do whatever it can to minimize the burden on businesses, spokesman Terry L. Lemons said.

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