Professors Jordan M. Barry and Bryan T. Camp have a timely piece in Tax Notes exploring how the tax that the Affordable Care Act imposes on those who do not have insurance (it’s not a penalty) cannot be collected through the normal means the IRS has.
Generally, the IRS has three tools to collect taxes: “the tax lien, the administrative levy, and the offset power.” So how can the ACA’s tax be collected?
However, the PPACA then goes on to provide for special rules that limit the tools the IRS may use to collect the tax penalty. First, the PPACA makes clear that a taxpayer’s failure or refusal to pay the tax penalty cannot lead to prosecution or criminal penalties of any sort.62 Enforcement is thus limited to civil collection methods.
Second, the PPACA imposes limitations on the IRS’s ability to use liens and levies. The PPACA prohibits the IRS from levying on any property to enforce the tax penalty.63 Thus, the administrative tax levy, like criminal penalties, would seem to be taken completely off the table, although it is not entirely clear that the language used fully accom- plishes that goal.64
Unlike criminal penalties and levies, the PPACA does not attempt to eliminate the tax lien. The PPACA does nothing to prevent the federal tax lien from arising, and thus the lien should still come into being automatically on the taxpayer’s refusal or failure to pay the tax penalty. Still, as a practical matter, the PPACA renders the tax lien largely irrelevant to the enforcement of the tax penalty.
And this interesting conclusion:
The PPACA would still seem to prevent the IRS from intentionally levying prop- erty with a value that exceeds a taxpayer’s out- standing federal tax liability in order to have surplus proceeds that the IRS could then apply to the tax penalty. It might be difficult to tell when the IRS was taking that approach when the item being levied is a piece of real estate, a boat, or some other piece of property that may not be easy to divide or for which the whole is worth more than the sum of its parts. But nearly all IRS levies are conducted against bank accounts and similar types of property, and the person levied on is only obligated to remit funds to satisfy the amounts listed in the notice of levy. Because the PPACA would prohibit the notice of levy from including the tax penalty amount, the IRS would not often be able to collect excess funds. Thus, in almost all cases, this would not help the IRS enforce the tax penalty.
The combined effects of the PPACA’s collection restrictions severely curtail the IRS’s ability to en- force the tax penalty. Although refusal or failure to pay the tax penalty will still give rise to a federal tax lien, it seems unlikely to be of much value to the IRS as an enforcement tool for convincing taxpayers to pay the tax penalty.
So what remedies are available? Offsets (tax refunds)
That leaves the IRS to rely on its final major collection tool: offset. In stark contrast to liens and levies, the PPACA places no restrictions whatsoever on offsets. However, unlike liens and levies, which the IRS generally can apply whenever any taxpayer fails or refuses to pay an assessed tax liability, the IRS can offset only when a taxpayer happens to have made an overpayment of tax. Currently, most individual taxpayers regularly overpay their in- come taxes through overwithholding, so as a prac- tical matter, this may not be a significant constraint.82
The restrictions placed on the IRS’s ability to collect the tax penalty make it unlikely the IRS can effectively enforce the individual mandate. The only major collection tool that remains unaf- fected is the offset, which, by its nature, applies only if the taxpayer happens to overpay her federal income tax obligations or is entitled to a net refund in a given year. Thus, many taxpayers who neglect or refuse to pay the tax penalty could structure their affairs in such a way as to avoid being subject to legal consequences of any sort for years to come, if ever. For those taxpayers, the individual mandate may not actually be mandatory after all.