Is The Individual Mandate Really Mandatory?

Thank you Alan for sharing valuable info as usual.

I wonder if collection of the penalty via offset also includes offset of state tax refunds? (I didnt' find this in my brief skim through the article).

One comment I would add is that this is not new information. I don't remember exactly where, but I distinctly recall reading about this issue (collection of the penalty limited to refund offset) many months if not years ago.

Why this topic hasn't yet been dissected to death in the mainstream media and exploited for possible political gain by both sides, I can only attribute to the ongoing information vacuum and deliberate mis-information surrounding the PPACA.

From the article (footnote numbers deleted):

Section 6402 authorizes the IRS to credit any overpayments against the taxpayer?s existing tax liabilities, including those being paid in installments. Any remaining overpayment is then credited against the taxpayer?s past-due child support obligations; debts owed to federal agencies; past-due, enforceable state income tax obligations; fraud-related liabilities arising from the unemployment insurance system; and, in some instances, the taxpayer?s estimated federal tax payments. If any overpayment remains after those offsets have been executed, section 6402 requires the IRS to refund that amount to the taxpayer.

I saw that bit, it concerns a state tax balance due. I was thinking of a state tax refund.

According to my reference book, California FTB will intercept a state refund to offset debt owed to the IRS, although IRS is 12th position on the priority list (behind child and spousal support, state agencies, and so on).

So, could a CA state refund intercepted by FTB be taken by the IRS to offset the PPACA individual mandate penalty?

That's a volunteer program that each state can sign with the Treasury Dept. I have not read the CA agreement, but I have to assume it includes any tax debt to the IRS that would include the tax, interest and penalty. As such, I would assume the answer to your question is "yes."

It could _if_ it knew about the PPACA individual mandate penalty for that individual, which the IRS isn't allowed to tell it.

Seth

Like most of us, I am flying blind. But, the offset program operates outside of the lien and levy programs. You are correct that the PPACA prevents the IRS from filing a Notice of Lien. Only the IRS and the taxpayer would know that there is a lien. I am not sure that prevents the FMS (I am assming the FMS administers the voluntary state refund offset program.) from notifiying a state that there is an outstanding tax liability for the taxpayer.

I found it:

From Kiplinger Tax Newsletter, Apr 16, 2010:

"The IRS? enforcement remedies are curbed. Basically, the Revenue Service is limited to offsetting refunds to collect the penalty. It is barred from filing a lien or levying on a filer?s assets. And interest will not be charged on unpaid penalties."

Not to be too cynical, but why does it take two law professors to write a ten page article over two years after the fact, only to conclude the same thing that Kiplinger did in their newsletter one month after the law was passed?

1. Because of the SCOTUS decision, the law is at the top of the news again, so it's worth examing.
2. The law article went into lots of detail about IRS's enforcement processes, so it was a useful article in general. Then it examined the new law in that context.
3. How do the credentials of the author of the Kiplinger article compare to legal scholars? Maybe it was worth their time double checking. Imagine if someone wrote an article in "Discover" saying he didn't think the Higgs Boson could be found, do you think that should have stopped CERN scientists from running their experiments?

Well, I did warn I was being cynical... Good points, all of the above. I plead guilty to anti-lawyerism.

As for the Higgs boson, are these guys (CERN scientists) any better (more ethical? efficient? economical?) than Congresscritters? At least I could actually read a 2,000 page tax law or a Supreme Court decision if I felt the need.

It's an excellent explanation, but it's not geared to lay persons. It's too long, and understanding the article means piecing all the disparate parts in the argument together.

Can wages be garnished? They garnish wages to pay child support. I suppose garnishing wages is a type of lien, but am not sure and am no legal expert. The article does not contain the word "garnish".

The article says

BEGIN QUOTE page 8-9

Currently, most individual taxpayers regularly overpay their income taxes through overwithholding, so as a practical matter, this may not be a significant constraint.82

However, taxpayers have a significant amount of control over the payments they make to the IRS. Thus, it would seem that a conscientious taxpayer has the ability to avoid this enforcement tool altogether through careful tax planning.

END QUOTE

This means taxpayers can increase their exemptions so that they owe money with their tax return, and then they can avoid paying the penalty.

However, can a levy be imposed on the penalty+interest of the penalty? For failure to pay there is a maximum 25% penalty plus interest.

Many taxpayers receive some credit, like the child tax credit, solar credits, eitc, child and dependent care credit. The individual mandate penalty will reduce these credits. Also, if they don't get credits one year, then can get refundable/nonrefundable credits in a future year, and the individual mandate penalty from prior years got negate these credits.

The IRS can offset your refund if you have one. If there is no refund to offset all they can do is file a lien that is not published. Only you and the IRS are aware of the lien. They can not levy. Garnishment is a form of levy.

The levy can only be imposed on money the IRS pays to the taxpayer, not on money the taxpayer pays the IRS (unless it's to be refunded to the taxpayer). So if the taxpayer underpays by too much, there's still nothing to levy.

No, it usually won't. Most taxpayers who receive credits still have a positive tax obligation, so as long as they adjust their withholding appropriately, there's no "credit payment" to levy.

Again, only to the extent that those credits exceed their tax liability (less payments).

Seth

The article talks about offset. What I'm saying, or repeating, is that the individual mandate can offset these other credits. Of course, if they adjust their witholding and exemptions so that they withhold money, then from the (il)logic of the tax law as it is written, they are not obligated to pay the penalty. Are you sure that most taxpayers who receive credits also owe money? I thought most people get a refund because W-2 witholding with 1 exemption (single/married) usually results in money back, and child tax credit and the others only make the refund greater.

This always struck me as a form of double secret probation.

Most people who receive credits have a net tax liability.

That's correct. It might be better to state that the individual mandate applies only to those who either have refundable credits that exceed their tax liability (the case in the article), and those who are unsophisticated about adjusting their withholding to avoid having a seizable refund.

Seth

In both tax years 2011 and 2012 over 77% of processed returns showed a refund to the taxpayer. The average refund was $2,805 in 2011 and $2,707 in 2012.

The Earned Income credit and Child Tax credit are very common credits based on the number of children. It can easily become impossible for a low or middle income person to adjust their withholding to avoid a large refund, especially if they have the full compliment of 3 children. Such individuals pay little or no federal income tax and receive refunds in the $2k - $3k range.

I have no difficulty in believing that the majority of US taxpayers are unsophisticated, especially when the cost to them (as now) is incredibly low (loss of interest on the overpayment, based on the numbers above, would average under $2).

Seth

How many of those individuals have income sufficiently high to be subject to the individual mandate penalty in the first place?

Seth