I recently had a conversation with a health insurance salesman who asked me if I knew how the penalty for non-compliance of the Affordable Care Act was collected. First, said I, you must answer on a tax form which months of the year you were in compliance with the ACA. Then for those months you were out of compliance, a penalty would be assessed. The size of the penalty depends upon such variables as household income, federal poverty line and the monthly premium of the lowest cost bronze plan covering everyone in your household (it is not a difficult worksheet, but coming up with the variables may be a challenge). The annual penalty is the greater of a percentage of your household income or a flat dollar amount, but is capped at the national average premium for a bronze level health plan available through the Marketplace.
The salesman answered “No, that’s not my question. My question was: how is the penalty collected?” Well, that’s an easier question. The IRS collects it when you file your return.
Still not satisfied, the salesman persisted saying that the law actually reads that the IRS can only collect the penalty from the refund they owe you. Hence, if you have no refund, the IRS cannot collect the penalty.
Apparently, the law forbids the IRS from using its normal collection techniques, like filing a tax lien. Nor is the IRS empowered to garnish wages or impose other penalties or prosecute for failure to pay voluntarily. So by process of elimination, some people believe that the only way for the IRS to actually collect the penalty incurred by ACA non-compliance is by withholding the refund they would otherwise have owed you.
So that’s the enlightened opinion of my friend the health insurance salesman as well as a Motley Fool contributor, a Forbes article and probably a whole gaggle of preppers in Coeur D’Alene, Idaho.
My question is: What does the IRS think?
The IRS Q & A says the following:
“The IRS routinely works with taxpayers who owe amounts they cannot afford to pay. The law prohibits the IRS from using liens or levies to collect any individual shared responsibility payment. However, if you owe a shared responsibility payment, the IRS may offset that liability against any tax refund that may be due to you.” (The IRS euphemistically calls the ACA penalty ‘shared responsibility payment’).
So it looks like the Motley Fool, Forbes and the preppers are all on the same page with the IRS.
This is my problem. If you always put yourself in a position to owe the IRS based upon your interim quarterly or withholding payments, never incurring a refund, you are adopting a “You can’t catch me” strategy. It does not mean that you don’t legally owe the penalty, it means you are avoiding paying the penalty. Are you confident that you can outlast the IRS as your penalty mounts year after year?
My solution is to pay the IRS what you owe the IRS – render unto Caesar that which is Caesar’s. I would let the preppers fight this battle.