Hearing on the Internal Revenue Service’s Implementation and Administration of the Democrats’ Health Care Law
Hearing on the Internal Revenue Service’s Implementation and Administration of the Democrats’ Health Care Law
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
COMMITTEE ON WAYS AND MEANS
WALLY HERGER, California
|SANDER M. LEVIN, Michigan
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
JIM MCDERMOTT, Washington
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
XAVIER BECERRA, California
LLOYD DOGGETT, Texas
MIKE THOMPSON, California
JOHN B. LARSON, Connecticut
EARL BLUMENAUER, Oregon
RON KIND, Wisconsin
BILL PASCRELL, JR., New Jersey
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
JENNIFER M. SAFAVIAN,Staff Director and General Counsel
SUBCOMMITTEE ON OVERSIGHT
DIANE BLACK, Tennessee
|JOHN LEWIS, Georgia
XAVIER BECERRA, California
RON KIND, Wisconsin
JIM MCDERMOTT, Washington
C O N T E N T S
Steven T. Miller, Deputy Commissioner for Services and Enforcement, Internal Revenue Service
Mr. Fred Goldberg, Jr., Partner, Skadden, Arps, Slate, Meagher & Flom LLP
Ms. Kathy Pickering, Executive Director, The Tax Institute at H&R Block; Vice President, Government Relations
Mr. Scott A. Hodge, President, The Tax Foundation
Mr. Seth T. Perreta, Partner, Crowell and Moring LLP
Hearing on the Internal Revenue Service’s Implementation
and Administration of the Democrats’ Health Care Law
U.S. House of Representatives,
Committee on Ways and Means,
The subcommittee met, pursuant to notice, at 9:46 a.m. in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]
*Chairman Boustany. This hearing will now come to order. Good morning and welcome to today’s hearing on the Internal Revenue’s implementation and administration of the President’s health care law.
Before we begin this morning, it is appropriate to recall that 11 years ago, almost to the hour, our nation was savagely attacked. After these 11 years, each of us can certainly recall exactly what we were doing at that time.
The horror of the day should give us the resolve to continue doing our business and demonstrate that we will not be intimidated or deterred.
More than a decade has passed but the attacks of the day still outrage, the tragedies still overwhelm, and the acts of heroism still inspire us.
We still mourn those lost on that day and all those who have given their lives since in the defense of liberty. We are thankful for those who continue to stand and volunteer to serve our country both at home and abroad.
We will take a recess from this Subcommittee’s proceedings at 10:45, so that those who wish to join the 9/11 remembrance in the Capitol can do so, and then we will promptly reconvene at 11:30 to resume the hearing.
We are going to watch the clock pretty closely and we will stop at around 10:45.
The Internal Revenue Service has enormous responsibility. It is tasked with administering our very convoluted tax system and a Tax Code that has changed nearly 5,000 times in the past ten years alone.
The agency is charged with collecting roughly $2.5 trillion, distributing hundreds of billions of dollars in tax credits, and enforcing 4,000 pages of tax laws, and 80,000 pages of tax regulations.
The agency’s core revenue collection function has increasingly been crowded by its responsibility to administer many social programs.
Through the years, Congress has sought to advance a multitude of non‑revenue objectives through the Tax Code, energy policy, housing policy, and of course, health care policy.
Making the IRS both revenue collector and administrator of these activities has diverted the IRS’ resources from its central mission and can diminish taxpayer service.
In 2010, Congress passed President Obama’s health care law, expanding nearly 1,000 pages and passed “so you can find out what is in it,” in the famous words of then-Speaker Nancy Pelosi.
The health care law contained 47 tax provisions and charged the IRS with vast new responsibilities.
These included the implementation and administration of the largest entitlement created in more than a generation, new penalty taxes on individuals and employers who fail to provide or buy Government approved health insurance, the need to quickly create vast new information technology systems, and the list goes on and on.
The President’s health care law has put the Federal Government in charge of approving health insurance plans, subsidizing them, punishing those who do not buy Government approved plans, and many other aspects of our health care system.
The Internal Revenue Service has been saddled with the responsibility of carrying out many of these new Federal activities.
More than creating new burdens on the IRS, the President’s health care law has led to new tax rules and regulations that will pose significant challenges to both individuals and job creators.
The Administration’s own documents state that the compliance burden of the new rules it has thus far written pursuant to the President’s health care law will add nearly 80 million man hours each to individuals and job creators. This is just the 17 regulations that have been issued so far. There are more to come.
Eighty million hours that will not be spent creating new wealth, providing health care, or doing anything productive.
Eighty million hours simply complying with new rules from Washington.
This is the burden from just the IRS’ new rules, the 17 new rules that have been promulgated. When you add the new regulations from HHS, the Department of Labor, and other agencies, the burden on our sluggish economy goes still higher.
As a former surgeon and owner of a small medical practice in Louisiana, I certainly know how taxes, rules and regulations from Washington can impede not only a small business but also patient care.
I am especially interested in hearing from the IRS and our witnesses today about how the new law will operate in the real world, in real time.
The object of this hearing is to assess the IRS’ efforts to administer the law, including its efforts on the Service’s core mission, and how decisions made now to implement it will affect both the agency and taxpayers as the provisions continue to come into effect.
Ladies and gentlemen, this is also not a hearing to beat up the IRS, an agency run by good men and good women. I want to emphasize that. Dedicated public servants who have an incredibly difficult job.
The agency did not write the health care law. The previous Congress did. It passed the law. Now we are finding out what is in it and what it means for the country and for the Internal Revenue Service and for taxpayers.
I look forward to the testimony and questioning of our witnesses. Now, I am pleased to yield to the distinguished Ranking Member from Georgia, Mr. Lewis.
*Mr. Lewis. Thank you, Mr. Chairman. First of all, I want to thank you for pausing to observe what happened to our country 11 years ago today. It is my hope and prayer that Americans all over will pause and observe what happened.
Mr. Chairman, I want to thank you for holding this hearing on the Affordable Care Act. We are always pleased to discuss our landmark health reform law which will expand health coverage to over 30 million Americans.
Because of the Affordable Care Act, children today cannot be denied insurance benefits due to preexisting conditions, and young adults can stay on their parents’ insurance until age 26.
Seniors are already saving hundreds of dollars on their prescription drugs and receiving free preventive services.
This morning, the Department of Health and Human Services announced that the Affordable Care Act has saved people with private insurance over $2 billion.
We must ensure that the Internal Revenue Service continues to move with all deliberate speed to deliver hundreds of billions of dollars of Federal tax credits to American families and small businesses, which will make health insurance affordable.
I am confident that the tax provisions of the Affordable Care Act will be carried out on schedule.
Today, I look forward to learning where we are in the process, the problems we have seen, and the issues that remain.
I want to thank all of the witnesses for their recommendations to address these issues. I also look forward to hearing from the agency about the resources it needs to fulfill its duties under the health reform law.
I continue to have serious concerns about the effect of recent budget cuts on taxpayers, tax collection, and agency operations.
This year, the agency’s budget was cut by over $300 million. This cut harmed taxpayers and tax administration. For fiscal year 2013, the IRS requested a budget increase of $360 million for administration of the health reform law. Almost 75 percent of this money will be spent on technology needed to deliver hundreds of billions of dollars in tax credits.
I look forward to hearing more about the IRS budget request and how the amount requested will help the agency complete its work on the health care law while protecting Federal tax dollars.
Thank you very much, Mr. Chairman.
*Chairman Boustany. Thank you, Ranking Member Lewis. Next, it is my pleasure to welcome two panels of witnesses before us today.
Today’s witnesses have extensive experience with the IRS and tax compliance, and I am delighted to have all with us.
Our first panel will consist of Deputy Commissioner Steven T. Miller. I want to welcome him again before our subcommittee. We appreciate you being willing to come before us today.
Steven T. Miller, Deputy Commissioner for Services and Enforcement at the Internal Revenue Service.
Deputy Commissioner Miller, the committee has received your written testimony, and it will be made part of the formal hearing record. You will have five minutes for your oral remarks as is customary. You are recognized for five minutes, sir.
STATEMENT OF STEVEN T. MILLER, DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT, INTERNAL REVENUE SERVICE
*Mr. Miller. Thanks so much, Mr. Chairman. Chairman Boustany, Ranking Member Lewis, members of the subcommittee, thanks for the opportunity to update you on the IRS’ staged implementation of the tax law portion of the Affordable Care Act.
As I begin, let me say that there is no doubt that implementation of the ACA has required and will continue to require a concentrated effort on our part.
However, the IRS has a successful history of such efforts. In this case, the IRS is taking full advantage of the fact that the major exchange related provisions, with respect to those, we will have time to plan our implementation and communicate with taxpayers.
The IRS began both short term implementation and long term planning immediately upon passage of ACA. Our efforts focused on two things. First, to quickly implement tax law changes that were retroactively or immediately effective.
Examples in this first category include the small business health care tax credit, the expansion of the adoption credit, and specific industry provisions such as those that focused on qualified therapeutic projects and the indoor tanning industry.
In terms of those provisions that had future effective dates, we moved quickly to put a structure and process in place to plan and implement these provisions.
Because many ACA tax provisions are substantial and require long term planning, the IRS established enterprise‑wide governance and planning processes, both in its business operations and its information technology divisions. This is a significant undertaking and a lot of work still lies ahead. However, by involving top leadership and using established best practices, we have made important progress.
We have prioritized our work based on the particular effective date of a provision and/or the need for the Government or taxpayers to build the systems necessary to support the new law.
This approach is taken whether we are talking about our IT work or how we prioritize our guidance to the community.
The IRS’ most substantial implementation efforts relate to our work with the exchanges and the premium tax credit. In this area, we are working on the secure delivery of information to HHS as well as other work that will ensure that advanced premium tax credits are available beginning in 2014.
The Department of Health and Human Services is the lead agency defining the structure and operations of the exchanges with Treasury and the IRS defining some of the associated rules.
As part of our efforts, we are working to provide clear and flexible guidance to the community, and we have done this after engaging in a robust dialogue with those impacted.
For example, we have worked closely with large employers to get them key pieces of guidance and time to set up their systems and procedures, including a number of simplifying safe harbors to assist in measurement and compliance.
In terms of guidance on ACA more generally, we have to date issued a variety of regulations, more than 40 notices, as well as a variety of revenue rulings, procedures, announcements, and frequently asked questions.
While there is much yet to be done, we have already accomplished a great deal.
In addition to building necessary systems and issuing guidance, we are working on how taxpayers will interact with the IRS as they file their returns. This involves both service and compliance.
We do have some time as most of these interactions begin during the 2015 tax filing season. Still, we are already engaged in discussions with tax return preparers and software developers so the taxpayers have what they need at the time they file their 2014 tax return.
Let me speak to one area in particular, as there have been numerous questions about how the IRS will verify individual coverage.
The IRS process for verifying coverage will be very similar to the one we have used for years to verify wages and withholding. The IRS will match what is reported on the tax return with the information reported by insurers.
We will follow up with taxpayers who appear to have over paid, under paid, and/or were not eligible for an exemption.
This will take the form of written correspondence. Revenue agents will not be doing this work. As required by the statute, we will not use levies, liens, or criminal prosecutions if taxpayers have unpaid amounts related to the individual coverage provision.
Thank you for the opportunity to testify on our planning and implementation efforts related to ACA’s tax provisions. It is a large undertaking but over the last several years, there have been thousands of tax law changes, some larger than others, and the IRS has implemented them all.
Our work to date on ACA is going well. We have the processes and structure in place to succeed.
I would be happy to answer any questions.
[The prepared statement of Mr. Miller follows:]
*Chairman Boustany. Thank you, Mr. Miller. We have a lot of uncertainty out there today amongst the business community and families with regard to what is going to happen with taxes. Of course, we know about all the expiring tax provisions that are coming at the end of the year unless Congress duly acts.
I would like to point out that the House has acted in July to avert rates from going up. I hope that the other body across the Capitol will move forward and do so hastily to eliminate this uncertainty that is ongoing.
With that having been said, clearly we know there is a lot of uncertainty related to ACA, the implementation, the tax implications.
I know the IRS has begun issuing regulations in accordance with the President’s health law with many more coming. In fact, I have these two binders right here. These are the regulations, revenue proceedings, revenue rulings, and Treasury decisions to date, encompassing some 17 new regulations the IRS has published so far, that will require nearly 80 million hours of compliance work by taxpayers annually. Eighty million hours so far.
This is according to the IRS and the Office of Management and Budget materials published in the Federal Register.
This includes over 25 million hours for information reporting by tax exempt organizations, over 40 million hours for small businesses, and almost three million hours for the self employed.
This additional 80 million hours is based only on what regulations have been published already, not on those coming. That is my understanding.
Mr. Miller, can you give us an estimate of the regulatory burden expected once the President’s law is fully implemented?
*Mr. Miller. First, I guess, Mr. Chairman, I do not know the 80 million figure, so I am not prepared to speak to whether that is correct or not. I am assuming it is correct, but I do not have that figure.
*Chairman Boustany. This is from IRS and OMB.
*Mr. Miller. I do not have a sense at this point for a total number of hours. Until we do the regulations and complete that work, that really is not possible.
*Chairman Boustany. I understand. Given what we have so far, is it possible to estimate the economic cost to our economy on this? Are you aware of any estimates of the economic burden this will impose on American taxpayers?
*Mr. Miller. Sir, you are talking to the Administrator, Mr. Chairman. I would not be able to speak to the economics of the situation, only to our working through the provisions and getting the guidance out to folks that need to comply.
*Chairman Boustany. This will certainly be a question we will need to further investigate with Treasury and others.
The President’s law creates new insurance subsidies and employer mandate taxes, which are tied to the subsidies. Under the language of Section 1401 of that law, the subsidies are only available to individuals enrolled through an exchange established by the state. That is the statute.
Yet, in August last year, the IRS proposed a rule that ran counter or seemingly ran counter to the plain language of the statute, providing for subsidies in states regardless of whether that state chose to create an exchange or not.
This gives rise to employer mandate taxes that are not provided for by the statute and some have alleged it was done at the urging of political appointees at the Treasury Department and the White House.
I know your position as Administrator is well taken, and I understand that. Can you publicly state whether the IRS had received any communication from political appointees at Treasury or anyone at the White House urging this reading of the statute?
*Mr. Miller. Let me start with how our regulatory process works, which is it is a tripartite discussion between the Department of Treasury, Office of Tax Policy, our Office of Chief Counsel, our lawyers, and the Internal Revenue Service itself, Doug Shulman and myself.
The jurisdictions, the Office of Tax Policy, really plays lead on policy matters. We take a look and see, as the IRS, is the proposed rule “administratable”, can we do it. We all have a part in talking to stakeholders about the rule.
Our Chief Counsel’s Office really speaks to what are the permissible reading’s of a particular statutory provision.
In this case, we probably did have discussions with the Administration, and that is not a surprise because where there is a multi‑agency regulation, generally that will happen. Who in particular was briefed, I do not know.
What I can say and what I want you to take away from this, Mr. Chairman, is the decision as to whether our reading of Federal versus just state was correct was made by our Counsel’s Office at the IRS. We believe it is the correct legal interpretation.
*Chairman Boustany. This was not solely an IRS determination but it was done with legal counsel at IRS in combination with those at Treasury and the White House?
*Mr. Miller. You are putting the White House in there, and I do not know they were involved. The decision on whether the regulation contained a provision ‑‑ to step around that a little bit, our position, and it is the IRS’ position, is that you cannot read that statutory provision alone. You need to look at not only the text but the context, the purpose, and the structure of the statute.
Our reading that a Federal exchange can provide a subsidy is a preferred reading, and it is the finding of the Chief Counsel’s Office at the IRS.
*Chairman Boustany. Okay. What we would like as a subcommittee are the dates and participants at all meetings, notes from those meetings. Certainly documents relating to that determination that the insurance premium subsidies apply to the Federal exchanges, federally created exchanges.
This is clearly something we dispute because the reading in the statute seems very clear. As you cite other aspects of the law, we would like to know what other aspects in the law were used in that determination by legal counsel and all outside input, including if indeed there was input from White House political advisors, but certainly I know Treasury was involved in this because it is a policy matter.
*Mr. Miller. Right.
*Chairman Boustany. If you could provide that to us as promptly as possible, we would certainly appreciate it.
*Mr. Miller. We will be glad to respond.
*Chairman Boustany. Thank you. With that, I will be happy to yield to my friend, the Ranking Member, for questions.
*Mr. Lewis. Thank you very much, Mr. Chairman. Mr. Miller, at this moment today, do you expect IRS to be ready for the health care law by 2014?
*Mr. Miller. Absolutely, Mr. Lewis.
*Mr. Lewis. You do not have any reservation, you are ready?
*Mr. Miller. We are ready. We will be ready. Based on what I know, based on our level of effort to date, based on the planning and structures we have put in place, we will be ready on the exchange related provisions and other provisions of the ACA.
*Mr. Lewis. Will the administration of the health care law harm the IRS’ core revenue collection mission?
*Mr. Miller. I do not believe so. I will step back from that question, Mr. Lewis. I do not recognize core versus non‑core in terms of the IRS’ work. This is what we do. Congress passes a statute, whether it is a charitable deduction or whether it is a home mortgage deduction, some of those things have varied purposes, but they are in the Tax Code.
We consider the ACA to be our core work. It is part of our core work.
*Mr. Lewis. Mr. Commissioner, has the IRS been listening to and working with outside stakeholders to provide guidance that is responsive to their needs?
*Mr. Miller. We have. In fact, I would note for the Chairman, in that big book, a whole bunch of that book are requests for comments and suggested safe harbors, and all the types of things we ought to be doing to engage the business community and others before we put out final rules.
*Mr. Lewis. As part of carrying out the health reform law, does the IRS plan to conduct education, maybe workshops, activities, outreach to taxpayers, employers and tax professionals? What has the IRS done so far?
*Mr. Miller. Again, here we are guided I our approach by the effective date of the provision. For example, the early provisions, we did something in excess of 1,500 meetings with small business over the tax credit for small business. We have done a couple of hundred meetings with folks in the tanning industry.
We have tried to engage those folks. As we move into 2013, we will obviously start working on what is going to happen with the health care credits later in that year.
This past year, we engaged more than 10,000 return preparers at our various tax forums around the country to try to educate them on what is here today and what is coming in the next year.
We have a very active outreach program.
*Mr. Lewis. Mr. Miller, for the year 2013, the IRS requested about $270 million for technology and operational support to deliver new tax credits.
I want you to explain to members of the committee why additional money is needed for the IRS’ computer system and how the computer system will be used to deliver the tax credits.
*Mr. Miller. IT builds are considerable. The first that is necessary is we are obligated under the statute to provide some taxpayer information, to provide income and family size, so that the exchanges can do their work as people come in to sign up and get the right amount of advance premium.
That work continues. We are working incredibly well with HHS and CMS to make sure that happens. That will be in place for the open season, which begins in late 2013. That is the first build.
We also have a build where we will have to receive the information returns from various parties to ensure that the correct amounts are being paid out and verify that. That work becomes very important as we have the filing season for 2014.
We have a whole array of work with respect to the exchange related provisions, and then there are some other provisions as well that require IT work.
We do have significant building to do in the IT arena.
*Mr. Lewis. Thank you very much, Mr. Miller. I yield back, Mr. Chairman.
*Chairman Boustany. Ms. Jenkins, you are recognized for five minutes.
*Ms. Jenkins. Thank you, Mr. Chairman. Thank you for holding this hearing, and thank you, Commissioner Miller, for being here.
Commissioner Shulman has said the President’s health care law, and I quote “Fragmentation of operational workload increases the difficulty of execution and will require an extraordinary amount of coordination with other players in the health care system.”
For example, HHS will have to reach out to IRS to verify income and family size. Homeland Security might have to verify immigration status. The Social Security Administration might have to verify citizenship.
All of this is occurring while a trillion in subsidies will be flying out the door.
Are you aware of any previous law that has ever required the IRS to interact so extensively with other governmental agencies, and what sort of stress will this extension interaction place on the IRS’ core function?
*Mr. Miller. We share taxpayer information under very stringent restrictions with an awful lot of folks, with the state tax authorities, the state Medicaid authorities, with Social Security. We have a long history of doing it. It does not stress us.
It does require us to work very hard to ensure that the safeguards are in place, that that taxpayer information is protected.
*Ms. Jenkins. No extra heavy lift on your part to coordinate?
*Mr. Miller. As I mentioned, the IT work itself is a decent lift for us. We are working on that and we will succeed on it, but it is a decent lift.
*Ms. Jenkins. Okay. The insurance premium subsidy will be based on a new definition of IRS household income, which is affected by the make up of families’ income, their personal finances and other personal matters.
Under the President’s health care law, individuals are responsible for informing governmental officials at the insurance exchange if they have changes to their household income during the year. This would be the adjusted size of their subsidy; is that correct?
*Mr. Miller. I am less familiar with that piece of that because that is not really the IRS piece.
It is true that when you come in the door to sign up for coverage and for an advance premium, there will be a discussion of what is your tax situation, what is the appropriate amount of the premium.
As things change during the year, I believe there is an obligation to come back and talk to the exchange about whether that impacts the amount of the premium.
*Ms. Jenkins. If I lose a current job or get demoted, lose pay or get a raise, any change in all of that, as you understand, I would need to inform a governmental official at the exchange?
*Mr. Miller. I do not know. I am quite sure it is not any change, Congresswoman. I cannot speak to that because that is an HHS sort of job to define that.
*Ms. Jenkins. Is there somebody that could get us that information?
*Mr. Miller. I would think HHS would be the place to go for that.
*Ms. Jenkins. Okay. Thank you. I yield back.
*Chairman Boustany. Mr. Kind?
*Mr. Kind. Thank you, Mr. Chairman. Thank you, Mr. Miller, for your testimony here today and the service that the IRS provides our nation overall.
I guess, Mr. Chairman, the big news this week for the Affordable Care Act that was revealed was Mitt Romney’s embrace of some of the provisions that are part of the Affordable Care Act.
To tell you the truth, it is not too surprising. For anyone who has read the actual legislation and understands what is in it and the provisions contained there, there has been wide embrace on both sides of the aisle on a variety of provisions.
I think Mitt Romney in the light of honesty and full disclosure admits himself there is a lot in the Affordable Care Act that he can work with, that he would like to preserve if he was elected President.
I thought that was a very revealing comment, but also not surprising given that he is the one that implemented his own health care reform, much of which was adopted with the Affordable Care Act here in Congress.
Whether it is preexisting conditions, young adults staying on their parents’ plans, I think the Governor has acknowledged there is a lot of good aspects of the Affordable Care Act that should be preserved and should be protected. I thought that was a very revealing and helpful comment.
I agree with Mr. Lewis. I think it is helpful for us to have from time to time oversight in hearings to see about the implementation of the Affordable Care Act, especially the IRS’ role in all of this.
I think we have heard Mr. Miller testifying in regard to some of the resources that IRS is requesting and what that money is going to be used for.
My sense is, and correct me if I am wrong, that the vast amount of the resources will be used as far as outreach and education and also some of the infrastructure needs that the IRS has in implementing the Affordable Care Act; is that right?
*Mr. Miller. That is correct. The biggest amount of the $360 million asked for in 2013 is actually for the IT build that we have talked about. A very small amount of it is enforcement or service, much of the balance is infrastructure to set up the processes to succeed.
*Mr. Kind. Mr. Lewis also asked you to respond to the outreach that is currently being conducted to the variety of stakeholders out there, whether it is businesses, individuals, tax preparers, things of that nature.
How would you describe that relationship and that communication with a lot of the requests for information coming into the IRS today?
*Mr. Miller. I think it has been robust. I think the second panel will be a perfect panel to talk to about that issue. I think overall, we have gotten a great response. Obviously, there is a great deal of interest, and most things, I think, people can live with and some things, they are continuing to talk to us about, which is the nature of a decent discussion, I believe.
*Mr. Kind. Will the IRS be involved at all in the enforcement of the Affordable Care Act, the requirement for health insurance for individuals?
*Mr. Miller. We will. That is a tax provision.
*Mr. Kind. To what extent will you be involved with that? Will this be conducting audits of individuals or businesses or what?
*Mr. Miller. I think, if I understand the question, Mr. Kind, and I alluded to this in my oral, with respect to the individual coverage provision, the IRS will, I believe ‑‑ we have talked about this ‑‑ there will not be revenue agents involved in this. These will not be audits. This will be a matching process. It will be something similar to what we see when we get in bank information with interest on it.
There will be a match to see whether there has been insurance. There will be correspondence with the individual, if it looks like they are not entitled to an exemption, and they will have the ability to converse with us about whether or not there should be a payment or not.
To the extent there is a payment, the statute is very clear in what we can and cannot do. We cannot do liens. We cannot do levies. We cannot do seizures. We cannot do criminal prosecutions.
The vast majority of people in this category, they will pay the money they owe. That is the way the American system works. More than 70 percent of the money that we collect from the balance of dues is collected not through drastic collection action, but when we correspond with someone, when we give notice or other correspondence.
I have no doubt that most people will comply with the payment. Those that do not, we have a limited amount that we will be able to do with respect to them, and we have talked about that at the end of the day, it might be an offset of ‑‑
*Mr. Kind. Some opponents in the past of the Affordable Care Act claim the IRS is going to have to staff up to the tune of 16,000 enforcement agents. Is there any basis for that number?
*Mr. Miller. There is no basis for that number.
*Mr. Kind. Thank you, Mr. Miller. Thank you, Mr. Chairman.
*Chairman Boustany. Thank you, Mr. Kind. Before we go to Mr. Marchant, just a quick follow up. I know you mentioned a significant amount of money requested for IT implementation. I just want to remind you that Mr. Lewis and I sent a letter not long ago. We are still waiting on a response.
It is about the IRS and what is going on with the money and the allocation for IT.
*Mr. Miller. We will get you that letter this week.
*Chairman Boustany. I appreciate it. Thank you. Mr. Marchant?
*Mr. Marchant. Thank you, Mr. Chairman. Mr. Miller, I would like to explore the new concept to the IRS of the household income. Since it is a brand new concept, is it a legal concept to the IRS at this point?
*Mr. Miller. It is in the statute itself. It is defined in the statute. It is a statutory provision.
*Mr. Marchant. Has the IRS made preliminary findings on what constitutes a household?
*Mr. Miller. I think we have. I think the statute sets it out. The statute basically says modified or adjusted gross income, which basically is off your tax return. The only twist to that is you have to add in for your family size, where you are taking a dependent, and that dependent is filing a tax return, that dependent’s income has to be added in as well. That is the only real difference. There are very few people in that category, Congressman.
*Mr. Marchant. Is it the IRS that will be the final person who decides what constitutes that household unit or will it be the exchanges?
*Mr. Miller. I believe, if I am understanding the question, that the IRS will be providing the exchange with information on any dependents that are filing a tax return in that unit.
*Mr. Marchant. If you have two people unmarried living under the same roof, each having a child, will that constitute a household, and which of the tax returns will be the main tax return that will constitute ‑‑ that will apply to the exchange?
*Mr. Miller. I will come back in writing if they tell me I am wrong, Congressman, but it is going to depend on who is taking whom as a dependent. The household is that individual who has some people being taken ‑‑ who is taking some people as a dependent on their return.
I do not know in a given situation whether the two unmarried folks have a dependency relationship in that respect or not or whether the children do or not. It really is going to depend ‑‑ the definition of “household income” is your modified adjusted gross income subject to some foreign provisions in tax exempt interest, and the income from those who you have taken on your return as a dependent provided that dependent has filed a tax return.
*Mr. Marchant. If you had two adults living in the same household that filed separate tax returns, would a married couple filing separate tax returns be constituted as a household?
*Mr. Miller. Well, I will answer the question in a different way, which is if you are married under ACA, to get the premium tax credit, you must file married, filing jointly. That is an eligibility requirement for the credit.
*Mr. Marchant. The physical living together has no part of the definition of “household.” It is defined by virtue of the IRS Code, purely?
*Mr. Miller. The physical proximity might have an impact on the dependency claim on the tax return. Again, it ties off to whether you are a dependent on that person’s return.
*Mr. Marchant. For the first time ever, it will be the IRS’ job to compile this and go through a separate step and define “household income?”
*Mr. Miller. The only separate step, Congressman, is including the income from a dependent who is filing a tax return. To be quite frank, you should have a general feel for what that income is if you are taking that person as a dependent because that is part of the test of taking that person as a dependent.
Much of that if not all of that discussion should be occurring already.
*Mr. Marchant. Heretofore, all of this information has been passed to the states and HHS basically on an individual basis, an individual tax return basis.
*Mr. Miller. Rather than as a household. I do not know the answer to that one, Congressman. I apologize.
*Mr. Marchant. Will the states get more information about households and IRS returns and will there be more people at the state level able to view more information about a person’s IRS income and IRS status than ever before?
*Mr. Miller. To the extent that the exchanges are using this for eligibility purposes, then those are new purposes, and probably new people that are taking a look at that data.
*Mr. Marchant. Thank you.
*Chairman Boustany. Mr. Reed?
*Mr. Reed. Thank you, Mr. Chairman. Thank you, Mr. Miller, for being here today.
I just want to follow up quickly before I get to another point on Mr. Kind’s comment. When he asked you about the 16,000 new employees for the IRS, you quickly and confidently said there was no basis for that number.
It is clear to me that you have taken a look at that situation in depth to be able to make such a quick response and confident response.
What I am going to ask you, Mr. Miller, is in 2012, I believe there were 1,278 additional employees to implement the Affordable Care Act that were requested and put forth in the IRS. In 2013, 859 new employees.
Do you agree with those numbers of employees that were increased in the staffing for IRS to implement the Affordable Care Act?
*Mr. Miller. No. It is a mis‑reading. The total number of people working on ACA in 2012, and I will be wrong on the specific number, but something like 670.
*Mr. Reed. 670 for 2012. For 2013, how many new employees will be doing that work, or is it just 670 is all you are going to need?
*Mr. Miller. It is the 670 plus the increment to get to the 859 you were talking about. 859 is the total number of folks.
*Mr. Reed. 670 in 2012 and the difference between 859 and 670 would be the increase for 2013.
*Mr. Miller. Right.
*Mr. Reed. From 2012 to 2013, the testimony is 859 new employees?
*Mr. Miller. No, sir.
*Mr. Reed. I am confused. Please correct me.
*Mr. Miller. Again, the total number of employees will be 859 employees in 2013. They are not additive. We already have 670, whatever the math is. I cannot do the math off the top of my head.
*Mr. Reed. The total for the two years, 2012 and 2013, is 859? Is that what you are saying?
*Mr. Miller. No, I do not think I am saying that. I am saying in 2012, we had 670 people work on it. In 2013, our intention is to have 859 work on it. They are separate numbers.
*Mr. Reed. Let’s go forward, 2014, the bulk of the law goes into further implementation, how many additional employees do you feel are going to be either hired or allocated to implement the Affordable Care Act thereafter?
*Mr. Miller. That number we are working on as we speak. We have a draft 2014 budget that is floating up into a discussion with Department of Treasury, OMB, and that will be part of the Administration’s budget.
*Mr. Reed. Okay. You are working on an estimate, you are working on a proposal. What does that estimate show you right now at this point in time?
*Mr. Miller. I do not have that number for you because again, it is an estimate and it has not been approved.
*Mr. Reed. You are working on it, I would hope.
*Mr. Miller. Yes, we are working on the 2014 budget, which is due in January.
*Mr. Reed. The employment needs for the IRS in 2015 and beyond, I hope you are doing some projections as to what you are going to need in order to implement the law.
*Mr. Miller. That becomes more difficult because again we operate on an annual basis. We are working on 2014 and we will see what we have in 2014, and that will inform along with where we are on various other business processes, what we desire in 2015. We do not have details.
*Mr. Reed. That concerns me, Mr. Miller. You are the agency that has been responsible or charged with responsibility for implementing this law. What you are telling me is you really do not have a clear indication as to what employment burdens are going to be put on the IRS as a result of this law. That is very concerning to me.
Would you agree that is concerning to a member of an oversight committee on your agency, that the agency should have some type of projection as to what those employment burdens are going to be and the costs associated?
*Mr. Miller. Mr. Reed, I understand your point, and if you were to give me a budget for multiple years, I might have a better sense of what I could do or not.
The budgetary process is an annual process. It is difficult for me given the scenario of budgets to have a precise number for you at this point for 2015. We are working on 2014, sir.
*Mr. Reed. How about anything past 2015? Nothing?
*Mr. Miller. We will be in steady state in 2016, sir.
*Mr. Reed. I have a few more minutes, I hope. I want to talk about the premium tax credits real quick. My understanding is the advance payment for that goes to the insurer.
*Mr. Miller. The insurance company.
*Mr. Reed. The insurance company, not the insured, but the insurer, which is the insurance company.
*Mr. Miller. Correct.
*Mr. Reed. If there is an over credit, and I know I am short on time, do you go back to the insurance carrier to get that over payment or do you go to the individual taxpayer?
*Mr. Miller. I would be glad to answer it. I am not sure I understand the question, sir. I apologize.
*Mr. Reed. Okay. I am out of time. I do want to follow up on that. I am concerned that the money goes to the carrier and yet the taxpayer ultimately, if it is an over payment situation, the money never gets from the carrier back to the individual. It comes from the IRS which then comes from the taxpayers.
*Mr. Miller. There will be a reconciliation process on both ends.
*Mr. Reed. I will submit written questions on that. I appreciate your input, Mr. Miller. I really do. Thank you. I yield back.
*Chairman Boustany. Thank you, Mr. Reed. If you could respond to that final piece in writing.
*Mr. Miller. We will do that.
*Chairman Boustany. Thanks, Mr. Miller.
*Mr. Paulsen. Thank you, Mr. Chairman, for conducting the hearing. Mr. Miller, last week we heard from the IRS about plans to publish revisions to Form 637 very soon. 637, that is the application for registration dealing with excise taxes in particular.
In reviewing this form, I am looking at the form, I know there are a lot of items that are listed that are subject to the excise tax. Items like gas guzzler automobiles, sports fishing equipment, fishing tackle boxes, bows, quivers, broadheads, points, arrow shafts, also alcohol, tobacco and gasoline are subject to an excise tax.
The public policy rationale in the past for excise tax has historically been to deter certain activities. As you know, the medical device tax, which is a part of the new health care law, is an excise tax. In my mind, the last thing we want to do is deter creation or innovation of these life saving, life improving drugs.
Do you believe as a matter of public policy it is appropriate to apply an excise tax to medical devices in a similar category as these other items?
*Mr. Paulsen. Do you think the line item we might see on a Form 637 is going to also include gas guzzling automobiles and life saving medical devices? Will there be a line item that will identify it for medical device companies in that manner?
*Mr. Miller. I do not know specifically. We are working hard. We have proposed regulations out on the medical device tax. We are working with the industry to make sure we try not to burden them and get them to know the rules and comply going forward.
I am not sure on the form itself. I am not familiar with it.
*Mr. Paulsen. According to the new law, the companies will have to begin paying this tax on January 1, which is just a few months from now. Am I correct in my understanding that no final rule has been released by the IRS yet on this?
*Mr. Miller. Right. That is close, sir.
*Mr. Paulsen. Without clarity of the rules, you said you were working with the industry, but I know they are expressing concern about having to comply with the new law, certainly. You say you are working with them?
*Mr. Miller. We are.
*Mr. Paulsen. There are about 7,000 of these companies across the country. They do a lot of medical devices. It could be diagnostic equipment. Many of these companies are not profitable. They are still going to be required to pay the tax. This fact does not take into account the administrative burdens of the tax that will come through the new IRS form, for instance.
Has the IRS done a Paperwork Reduction Act analysis to measure the administrative burdens of the device tax on companies?
*Mr. Miller. I do not know the answer to that. I can get back to you on that, sir.
*Mr. Paulsen. That would be good to know. I am just curious.
*Mr. Miller. If I could say one thing. The burden that has been placed on ‑‑ it is a statutory provision. We did not create this out of whole cloth, sir.
*Mr. Paulsen. I know there is going to be additional paperwork, costs for companies to comply with the tax. It is also my understanding that the excise tax payments are traditionally collected semi‑monthly or every two weeks.
Do you think that model would fit for many of these companies which have the experience essentially of making estimated income tax deposits on a quarterly basis, but they do not have any experience in the Federal excise tax component, and I do not think they have systems in place for calculations.
Is there consideration being taken into account for that?
*Mr. Miller. I do not know the answer to that question either, sir. Again, we are working with them. The proposed regulations are out. The number of issues, Congressman, are not a myriad. There are a few issues that remain unclear and we are working with them on. A lot of this has been put out and discussed.
*Mr. Paulsen. Okay. Mr. Chairman, I just raise some of these issues because I think we are clearly going in a precarious situation or dangerous situation for a lot of these companies that provide a lot of jobs, it is domestic manufacturing, and we have analyzed a little bit of what the effects of the tax would be.
We have tried to stop it. We have repealed it in the House in a very strong bipartisan vote.
Now that we are moving forward on January 1 and these companies are laying off employees already, I want to make sure we are also taking into account the paperwork connections and the IRS following up on the Paperwork Reduction Act analysis and process as well.
I yield back.
*Chairman Boustany. I thank the gentleman. I think the gentleman is correct in that we have a lot of uncertainty in the policy of the law but also concerns about the implementation, too, and the timing.
This is creating uncertainty for business, and it is certainly not helping our economy.
Ms. Black, you are recognized for five minutes.
*Mrs. Black. Thank you, Mr. Chairman. Mr. Miller, I want to go to the privacy issue. As we know, there are few things more sacrosanct to people than having their tax information known broadly and widely to other folks.
An entire section of the Tax Code, Section 6103, as you well know, is devoted to limited instances in which this information can be shared, but in the wrong hands, taxpayer information can be used to steal tens of thousands of dollars from the Treasury. We have already seen instances of that. We have had hearings here related to that matter.
It contains information of a personal nature, about personal finances, and family information.
Underneath of the President’s health care law, the IRS will be sharing this information, this taxpayer information, more broadly with many more parties than you ever have before.
While the IRS already shares some of this data with places like child support, we have heard about that in testimony, Medicaid and some other revenue collection situations, this new sharing is going to be much broader, especially since the exchange employees will be taking place.
How do you plan to make sure this information is fully protected?
*Mr. Miller. Congresswoman, this is what we do. We do this quite a bit already. We have hundreds of agreements with various governmental agencies.
The process is quite restrictive actually, and I think if you would talk to other agencies, they would tell you how restrictive we are in terms of making sure that the information that is sent needs to go ‑‑ once it arrives, it is stored properly, it is subject to appropriate controls in terms of who has access to it, and is subject to either destruction or return to the IRS when it is no longer needed.
These are rules, and I can outline these in writing, these are safeguard rules, that we have an entire part of the IRS working with folks on.
We will come to an agreement with a particular Government entity or the exchange as to what is the expectation of what will happen with that data. We will then go on‑site and inspect to ensure that document is correct.
We have quite detailed rules in the area because we take it incredibly seriously.
*Mrs. Black. You already have memorandum’s of understanding with agencies and exchanges?
*Mr. Miller. Not exchanges at this point, I do not believe.
*Mrs. Black. Not exchanges. You say you already have rules in place?
*Mr. Miller. We have rules in place generally, Congresswoman, for this sort of situation.
*Mrs. Black. Okay. Can you provide us with what you are doing with those agencies as that comes along? I think that will be important for this Committee, considering the fact, as I say, we have already had hearings about how taxpayer information is used by people to fraudulently get their return, get money back that does not belong to them.
I think it would be important for this Committee, this oversight committee, to know that we are protecting even more information with even more people that are going to have access to this.
My next question is what will be the repercussions against exchange employees or contractors that mis‑use taxpayer information? Do you already have something in place?
*Mr. Miller. I will come back to you on that, but I believe they are subject to the same restrictions as I am in terms of being subject to criminal prosecution and other penalties for disclosing that information.
*Mrs. Black. I would appreciate you keeping this Committee in touch with what you are doing so we can be sure that absolutely is happening considering all the things that are happening with people’s information right now.
Thank you. I yield back the balance of my time.
*Chairman Boustany. Thank you. Mr. Miller, I think that concludes our questioning. We appreciate you being here today and providing this information.
Of course, there is more work to be done as we look at the implementation of this. We look forward to hearing from you in the future. We appreciate your testimony and your forthright answers.
*Mr. Miller. Thank you.
*Chairman Boustany. We are going to ask the next panel to come forward, and we will start taking testimony. We will recess, as I mentioned earlier, to attend the commemoration, and then we will resume at 11:30.
We will ask the next panel to come up and we will try to get through some of the testimony.
I want to thank our next panel of witnesses for being with us today. We have four experts on this subject.
First, we will hear from the Honorable Fred Goldberg, a partner of Skadden Arps, a law firm here in Washington, D.C. Mr. Goldberg is a former IRS Commissioner, former Assistant Secretary of Treasury for Tax Policy.
Next, we will welcome Kathy Pickering. Ms. Pickering is Executive Director of The Tax Institute and Vice President of Governmental Relations at H&R Block.
Third on the panel is Scott Hodge. Mr. Hodge is President of The Tax Foundation here in Washington.
Finally, we will hear from Mr. Seth Perretta, a partner of the law firm Crowell and Moring.
We want to thank you all for being with us today. The committee has received your written testimony and it will be made part of the formal hearing record. Each of you will be recognized for five minutes for your oral remarks.
Mr. Goldberg, we will start with you for five minutes. We will try to get through two statements. We will recess and come back promptly at 11:30.
Mr. Goldberg, you may proceed.
STATEMENT OF FRED GOLDBERG, JR., PARTNER; SKADDEN, ARPS, SLATE, MEAGHER & FLOM
*Mr. Goldberg. Mr. Chairman, Ranking Member Lewis, members of the committee, it is an honor to appear before you today to discuss the impact of certain revenue provisions of the Affordable Care Act on taxpayers and the IRS.
I am appearing today solely in my individual capacity.
Many years ago, I had the pleasure of appearing before this Committee during my time as IRS Chief Counsel, as IRS Commissioner, and as Assistant Secretary for Tax Policy.
Your committee has a long bipartisan history of concern for effective tax administration and your efforts have served the American people well.
Before starting, I would like to make a preliminary observation. The administrative, behavioral and tax compliance issues you are considering are inherent in any policy that provides phased out tax credits to subsidize the purchase of health insurance, including, for example, the Ryan‑Wyden proposal. They are not unique to the Affordable Care Act.
Much of my written statement explains in some detail why my experience as IRS Commissioner convinces me that the revenue provisions of the Act in their current form will become a burdensome, costly, and frustrating quagmire for millions of Americans, and will cause significant non‑compliance with our tax laws.
My oral statement does not address portions of my written statement dealing with adverse impact of the Act’s financial incentives on employers and individuals, but I will be happy to answer any questions.
What I want to emphasize today is my experience as IRS Commissioner also convinces me that these failing’s are unnecessary and are easily minimized.
Chief Justice Roberts and four of his colleagues have decided that the revenue provisions of the Act are all about the Government’s taxing power.
I believe they got it right and the best way to avoid administrative, behavioral and tax compliance melt down is to embrace this reality.
First, now that we know the revenue provisions are all about the Government’s taxing authority, there is no longer any reason whatsoever why each of 51 different exchanges should have responsibility for determining the proper amount of health insurance tax credits on behalf of millions of individuals and families.
The exchanges will be starting from scratch with information that is two years out of date because personal and financial circumstances change. Change is the one constant in our real lives. The exchange’s credit calculations will be too high or too low most of the time. Now, in hopes of getting it less wrong, each exchange will need to obtain sensitive personal and financial information from millions of individuals and families and it will need to do so throughout the year because life’s changes do not follow the bookkeeper’s calendar. These efforts will require direct interaction with millions of individuals and families in ways that meet their reasonable expectations and allow them to make timely decisions.
Decades of IRS experience make clear that as citizens, we want our questions answered and our issues resolved promptly, properly, and in ways we understand. We are sharing intimate details of our personal and financial lives and expect that our information will remain confidential, and because the stakes are so significant, our health and hard‑earned money, we have high expectations and little tolerance for mess ups.
These responsibilities are not going to be core competency of the exchanges. There is no reason they should be and there is no chance the exchanges will get it anywhere near right. They are facing more than enough challenges without functioning as some weird hybrid of tax advisor and tax enforcer. Let folks figure out their expected credits with support from a long‑established network of public and private intermediaries and let them make appropriate representations to their exchanges. They have been doing this kind of thing for decades in their dealings with the IRS. Taking the exchanges out of the picture will make things far less intrusive, burdensome, and costly and will save the exchanges a fortune.
Second, from the standpoint of tax compliance, the current sanctions for overstating the amount of health insurance tax credit, coupled with limits on IRS enforcement activities, effectively guarantee that there will be widespread noncompliance. To avoid these compliance issues, treat these taxes like all other taxes.
Thank you very much.
[The prepared statement of Mr. Goldberg follows:]
*Chairman Boustany. Thank you, Mr. Goldberg.
Ms. Pickering, you’re recognized for five minutes.
STATEMENT OF KATHY PICKERING, EXECUTIVE DIRECTOR, THE TAX INSTITUTE AT H&R BLOCK; VICE PRESIDENT, GOVERNMENT RELATIONS
*Ms. Pickering. Good morning, Chairman Boustany, Ranking Member Lewis, and distinguished members of the Oversight Subcommittee. Thank you for the opportunity to share H&R Block’s views on the IRS’s implementation of the Patient Protection and Affordable Care Act.
H&R Block is the country’s leading provider of tax preparation services. In each of your districts, we have on average 37 offices, 12 franchisees, and 323 preparers. We are one of the largest employers of military spouses in the nation and we work alongside the IRS to help taxpayers annually file about 25 million returns.
Clearly, the implantation of ACA is a significant undertaking and we commend the IRS for the progress it has made; however, it will face numerous challenges and conflicting demands for resources.
First, the IRS and HHS have two very different missions and focuses with respect to the ACA. HHS will focus on ensuring that everyone has healthcare coverage. The focus of the IRS will be on enforcing tax law, reconciling advanced payments of the premium tax credit, and collecting revenues from the various tax provisions of the ACA.
For example, HHS has stated that an individual can enroll in an exchange, but using documentation from other sources to substantiate income levels; however, the IRS will require individuals to file a tax return to reconcile advanced payments of the premium tax credit. As a result, individuals may receive an unpleasant surprise when they find out that they have a tax liability because they improperly estimated their income. We recommend the IRS and HHS develop consistent processes for income verification and eligibility. Requiring individuals to provide tax return information is the most reliable, consistent way to provide this verification.
The second area I wish to highlight is the need for finalizing regulations and educating the greater tax community. There are many key provisions that still need to be finalized in order to implement by January 1, 2014. As a franchisor, H&R Block is concerned about the impact and timing of new regulations on small business owners. For example, small business owners will need at least four months to plan and to determine if they will participate in a small business health options program where enrollment begins in October 2013. We recommend that, given the time required to publish regulations, the IRS should ensure all ACA regulations are proposed by April 30, 2013.
To be successful, the IRS and HHS must also provide individuals with timely education and guidance. This may be one of the most challenging tasks the IRS will face in 2013. We recommend the IRS leverage the tax preparation community through the Return Preparer Initiative to amplify taxpayer outreach and education efforts. To do so, the IRS and its testing vendor need to ensure they have sufficient testing capacity across the country to meet the December 2013 deadline; however, the IRS has ongoing operational challenges which will be magnified by the difficulties of implementing of ACA. Therefore, a third and final area of importance is ensuring readiness for the 2013 tax season.
In the 2012 tax season, millions in refunds were delayed in the early season due to fraud system programming errors and transmission problems with the Modernized e‑File System, coupled with a decrease in IRS toll‑free phone services in 2012. Taxpayers dealt with increased hold times and a decreased level of service. The IRS must complete the full transition to the Modernized e‑File System, continue to improve fraud controls, respond to late tax legislation, and successfully implement the Return Preparer Initiative, all while handling the effects of a late start to the e‑filing system currently set for January 22nd. This means that many early season, low‑income filers will not receive their much needed refunds until well into February.
We recommend that the IRS begin accepting and processing e‑filed returns no later than January 15, 2013. Additionally, the IRS should maintain legacy as a contingency and provide the framework they intend to use to determine if it will be deployed. More importantly, the IRS should promptly notify the tax preparation community and taxpayers of problems with processing returns.
In conclusion, the IRS and HHS together have a daunting task ahead and the IRS should use the upcoming tax season to improve several key areas of tax administration in order to be better positioned to fully implement ACA. H&R Block looks forward to continue to working with the IRS in these and many other areas.
Chairman Boustany, thank you once again for organizing today’s hearing and for the opportunity to testify.
[The prepared statement of Ms. Pickering follows:]
*Chairman Boustany. Thank you, Ms. Pickering.
We are now ‑‑ the Committee is now going to recess for the commemoration of 9/11. I appreciate the panel’s patience with us. We will promptly reconvene at around ‑‑ right about 11:30 at the conclusion of that commemoration and we will proceed from there.
So we thank you. Committee stands in recess.
*Chairman Boustany. We would like to reconvene the hearing. I would ask the panelists to please take their seats.
The Subcommittee thanks you all for your patience with this delay we have had and ‑‑ but, anyway, we will continue onward.
And Mr. Hodge, you are recognized for five minutes for your oral statement.
STATEMENT OF SCOTT A. HODGE, PRESIDENT; THE TAX FOUNDATION
*Mr. Hodge. Thank you, Mr. Chairman and Mr. Lewis and members of the Committee. I really do appreciate the opportunity to talk about this important topic.
I am sure you all agree that the ideal tax system should do only one thing and that is raise a sufficient amount of revenues to fund the government activities with the least amount of harm to the economy, but by all accounts, the U.S. Tax Code is far from that ideal. Our current tax system is a byzantine monstrosity that spans 70,000 pages, costs taxpayers more than $160 billion a year to comply with, and now dictates virtually every aspect of our lives, and even before the ACA grafted more than 40 new provisions to the Tax Code, the relentless growth of credits and deductions over the past 20 years has made the IRS a super agency, engaged in policies as unrelated as delivering welfare benefits to subsidizing energy‑efficient refrigerators.
Although the IRS’s annual budget may be relatively small, it is essentially controlling vastly more budgetary resources than any cabinet level agency. The more than 170 different tax expenditure programs in the Tax Code have a total budgetary cost of over $1 trillion and these myriad tax provisions were enacted to achieve all manner of social and economic objectives, but the most troubling development in recent years is that the expanded use of these tax credits to deliver social policy has knocked millions of people off the tax rolls and turned the IRS into an extension of the welfare state, a role that it has not managed very well, and today there are a record number of Americans, 56 million in all, 41 percent of all filers now pay no individual income taxes because of the generous credits and deductions, and worse yet, the IRS now gives out more than $100 billion in refundable credits to people who have no income tax liability.
In 2010, the budgetary costs of both refundable and nonrefundable tax credits exceeded $224 billion, and to put this in perspective, if tax credits were combined into a single program, they would be the fourth largest domestic program behind Social Security, Medicare, and Medicaid, and the ACA’s generous tax credits and cost sharing programs will no doubt increase the number of non‑payers and increase the IRS’s role as a deliverer of social benefits and the IRS has a dismal record of managing these tax credit programs. So we should expect the ACA to lead to billions of dollars in fraud, abuse, and erroneous payments.
The Treasury’s own IG for tax administration has testified here that refundable credits are a magnet for unscrupulous individuals who file erroneous claims for these credits and the IRS’s failure to rein in the sizable amount of fraud and improper payments in programs such as the EITC and the Hope Credit should give us great concern about the ability of the IRS to skillfully manage the ACA, and the IRS stumbled out of the gate in implementing some of the earliest and perhaps the simplest provisions of the ACA, such as the Small Business Healthcare Credit and the indoor tanning tax.
Many business owners said that the benefits of the Small Business Health Insurance Credit was not worth the effort and you can’t blame them considering that calculating the credit takes multiple steps and seven different worksheets, and the IRS also had difficulty simply identifying the number of businesses who are supposed to pay the tanning excise tax.
In many areas, the ACA makes the IRS an extension of the Department of Health and Human Services. The Premium Assistance Credit is a case in point where HHS has the authority to make the rules while the IRS and Treasury are responsible for doing the paperwork, policing the system, cutting the checks, and fixing any problems that may arise.
Now, imagine if the Supplemental Nutrition Assistance Program were run in the same fashion where eligibility for SNAP benefits was determined by USDA, but the IRS was responsible for verifying the incomes of recipients and either giving a food tax credit directly to taxpayers or sending checks to grocery stores on their behalf. Does anyone think that that would make for an efficient and user‑friendly system?
The added compliance costs of the ACA will fall disproportionately on small businesses and the poor. Already about 73 percent of those people claiming their income tax credit pay a professional preparer to complete their tax return and no doubt that number will arise because of the ACA. The irony is that many taxpayers, low‑income taxpayers, will have to ask themselves how much they can afford to pay a professional tax preparer in order to claim a tax credit that is intended to pay for health insurance that they currently cannot afford.
In conclusion, Mr. Chairman, it is hard to believe that anything can make the Tax Code look simple and understandable, but the Affordable Care Act does just that. The solution is not to give the IRS more money, resources or staff. The solution is to reform the Tax Code and eliminate the most burdensome and distortionary tax preferences and return the IRS to its core mission of simply collecting the necessary revenues to fund government programs.
Thank you very much for this opportunity. I welcome any questions that you may have.
[The prepared statement of Mr. Hodge follows:]
*Chairman Boustany. Thank you, Mr. Hodge.
Mr. Perretta, you may proceed with five minutes.
STATEMENT OF SETH PERRETTA, PARTNER; CROWELL & MORING, LLP
*Mr. Perretta. Thank you, Mr. Chairman and members of the Subcommittee. I am Seth Perretta, a partner at Crowell and Moring, where I lead the firm’s employee benefits practice. I am here today on behalf of the American Benefits Council for whom I serve as outside health tax counsel.
The Council’s members are principally major national employers, as well as health insurers and employee benefit advisors. Collectively, the Council’s members either sponsor directly or provide services to health and retirement plans covering more than 100 million Americans.
I would like to briefly address three points today. The first concerns the job that the Treasury Department and the IRS have done in helping employers and others comply with the Affordable Care Act, the second is to refer to a few examples of how the agencies have resolved the challenges faced by employer sponsors of health plans, and the third is to mention some of the important decisions yet to be made.
First, whether one believes the Affordable Care Act represents good policy or bad policy, everyone ought to agree on two points. Namely, the Act is a large and complex statute involving many new responsibilities for employers and other stakeholders, and given that reality, the Treasury Department and IRS have overall done a very commendable job helping employers and others understand and comply with the law’s requirements.
As referenced in my written testimony, the Council and the employer community as a whole have not always agreed with the interpretations that the agencies have made regarding certain provisions of the Act. For example, the agencies’ interpretation of what constitutes a grandfathered plan is an example, but it has been our experience that the agencies have generally sought to give employers flexibility in implementing the law and I can say without reservation that the agencies have been very accessible during this process to us, not only welcoming input from us, but also actively seeking out our views on how to make the law more administratable.
Since March of 2010, the American Benefits Council has hosted 14 webinars for our members on different aspects of the Affordable Care Act. Collectively, thousands of employee benefits professionals nationwide have participated. IRS or Treasury officials have directly presented at a great many of these programs and have been a very valuable technical resource for all of them.
In the same vein, I just completed my term as chairman of the Employee Benefits Committee of the DC Bar where we hosted seven programs ourselves related to the ACA for the benefit of legal practitioners across the city. Again, the agencies’ officials actively participated in these programs upon request.
These sessions and other formal and informal communications have allowed the regulators to answer numerous questions from employers as well as benefit practitioners. Of equal importance, the agencies have used these opportunities to better understand the design and operation of employer sponsored health plans so they could address the true diversity of plan offerings that exist and develop rules regarding implementation.
Second, time does not permit a lengthy discussion of specific regulatory projects, but my written testimony addresses some in greater detail, and of course I will be pleased to answer any questions you may have about them.
The first concerns the requirement for employers to include the value of employer healthcare on an employee’s form W‑2 starting for the 2011 tax year. Employers had many questions and concerns about this new requirement, including whether particular coverage was to be included on the form, and if so, how do actually value that coverage. In answering these questions, the IRS incorporated many employer suggestions and in fact gave employers a much needed one‑year reprieve in complying with the new requirement.
Another example concern to the law is the so called pay‑or‑play provision and the challenge of defining what constitutes full‑time employment and whether coverage is deemed affordable. This is relevant both from employer penalties as well as for purposes of the premium tax credit. The IRS has crafted safe harbors that will make these determinations simpler for plan sponsors.
A third example relates to the way in which IRS allows employers to treat multiple plan offerings for purposes of determining their financial obligation to pay one of the new fees prescribed by the law. I believe one of you mentioned the medical device tax. Well, this is ‑‑ there is another fee called the PCORI fee and the IRS issues favorable guidance from the employer perspective that makes it easier to comply.
Again, with respect to all three examples, it goes without saying that many companies may not like the underlying requirements, but IRS action has made compliance with these provisions more straightforward and flexible to accommodate a variety of plan structures.
The third and final point I want to emphasize concerns the future. In the coming months, employers will need clear and easy to follow guidance in order to fulfill a number of reporting and disclosure obligations, including just six months from now a March 2013 notice related to state insurance exchanges. The IRS also needs to more fully explain how employers are to determine whether the plans they offer provide minimum value for purposes of the Act’s pay‑or‑play provision. And likewise, employers who sponsor wellness programs to improve the health of their employees and control healthcare costs need to know how wellness incentives will be taken into account for determining whether an employer‑sponsored plan is deemed affordable.
With respect to these and other regulatory projects yet to be developed, we urge the IRS to continue to be receptive to input from employers in the same fashion that it has sought to do so from day one of the Act.
Thank you for allowing me to testify this morning. I would be pleased to answer any questions.
[The prepared statement of Mr. Perretta follows:]
*Chairman Boustany. Thank you, Mr. Perretta. We will begin questioning.
Our tax laws provide financial and behavioral incentives to actors across our entire economy, some intended, others not.
Mr. Goldberg, in your experience both as a government official in multiple capacities and a tax practitioner, I think you probably have a deeper understanding than most of us about how that all plays out. Can you describe in greater detail some of the unintended consequences the new law might provide?
For example, might it provide incentives for employers to dump low‑income employees into an insurance exchange or shift workers to part‑time employment?
On the individual’s side, does it incentive healthy individuals to forgo buying health insurance until they are sick or injured?
Could you comment on some of the unintended consequences that might ensure?
*Mr. Goldberg. Sure, Mr. Chairman.
My experience tells me that the American people are extraordinarily responsive to incentives created by the Tax Code. They are aided in this process by a massive infrastructure of advisors. For the most part, I think this is healthy. This is part of who we are.
The way the Affordable Care Act is currently structured, I believe that employers will have significant incentives to discontinue group coverage and split their savings with employees. I believe that is going to happen. I believe that the current tax penalty structure for failure to purchase insurance on an exchange clearly provides a young, healthy individual to not purchase the policy until he or she is in need of insurance. So this is going to happen and it is going to happen for sure.
You can change it. You have decades of collective experience in structuring incentives. If you structure the incentives properly, you will change the behavior.
*Chairman Boustany. Others want to comment on this, on unintended consequences?
*Mr. Hodge. Yes, Mr. Chairman.
If you are looking to reduce the cost of healthcare, this is not the way to do it, and for instance, two taxes in particular, one is the medical device tax, which the ultimate payer of that tax will be insurance companies of the first order, ultimately consumers, but that will cascade down to consumers eventually. In addition to that, there is the fee that is being placed on insurance companies. That will also cascade down to the payers, the companies, businesses, and individuals.
*Chairman Boustany. In higher premiums then?
*Mr. Hodge. In higher premiums. So these will actually jack up the cost of premiums in insurance. So if the intended goal is to reduce that, this is going to have a contrary effect.
*Chairman Boustany. Thank you.
Others want to comment on this?
Mr. Hodge, you made a comment in your statement and it is also in your written statement about the tax credits that we have thrown throughout our entire Tax Code and the sheer complexity of this and you made a statement and I want to make sure I have this correct. It constitutes the ‑‑ it would constitute the fourth largest social welfare program.
*Mr. Hodge. That’s correct, Mr. Chairman.
If you add up to the total cost in both the refundable and nonrefundable costs of all of the tax credits that are currently administered, it would be the fourth largest domestic program in the budget. They currently total $224 billion and that would make them fourth only to Social Security, Medicare, and Medicaid.
*Chairman Boustany. And so now we are going in a direction ‑‑ with ACA we are going in a direction of more complexity in the Tax Code rather than the stated goals of trying to get to a simplified Tax Code with lower rates?
*Mr. Hodge. Well, we have certainly turned the IRS now into a full‑blown governmental agency managing vast numbers of programs in a way that it was simply not intended to do.
*Chairman Boustany. Thank you.
And I would like to hear from the panel on how the new responsibilities from the healthcare law might affect the tax gap. I think when I read through testimony, this was raised, and Mr. Goldberg, I know you mentioned a threat of an increased tax gap in your written testimony. Could you expand on that?
*Mr. Goldberg. Yes, Mr. Chairman.
Again, I have a simple story. This is a tax. Treat it like a tax. The current penalties for noncompliance, and I am talking principally about on the credit side, there is no interest, there are no penalties. The IRS is not going to engage in its customary enforcement efforts. This is an ugly story. It is not happy, but it is true, and if you give ‑‑ if you simply let the IRS do its job the way it does elsewhere, you will mitigate significantly these compliance problems.
It is not a perfect marriage, but it has been around a long time and despite what others say, I believe the IRS and taxpayers pretty much have worked it out pretty well and if you are going to go down this road, let taxpayers do their job, let the IRS do its job, and I believe it will significantly minimize noncompliance, but as currently structured, it is going to be a mess.
*Chairman Boustany. So we will see a widening of the tax gap?
*Mr. Goldberg. Yes, sir.
*Chairman Boustany. And the revenue generated from these taxes in ACA are basically a significant part of the funding of the new program, the coverage expansion; is that correct?
So we are going to see a widening tax gap, but also significant underfunding of the proposed program; is that a fair statement?
*Mr. Goldberg. I believe it is, Mr. Chairman. I think your committee historically has done an admirable job bipartisan supporting adequate funding for the IRS. They are charged with immense responsibility and they should be funded properly to discharge it.
*Chairman Boustany. Thank you.
Others want to comment on the tax gap issue? No.
Thank you. That’s all I have.
*Mr. Lewis. Thank you, Mr. Chairman.
I want to thank each one of you for being here today, taking the time and being so patient.
Mr. Perretta, s reached out to the IRS on issues related to health reform, to the health reform law, and what have been your experience in term of the IRS responding?
*Mr. Perretta. I speak with folks at the IRS and Treasury on issues both on behalf of the American Benefits Council and on behalf of my issuer and employer clients on a very frequent basis. I would say I speak with them probably on a biweekly or certainly once a month on issues of emerging importance in terms of figuring out how to comply with these rules and I can say that the response has always been fantastic.
The IRS and Treasury, I really think, in many respects as a federal agency are a model for making themselves available to help comply with their rules. They always make themselves available to provide both explanations on an informal basis to individual practitioners, but also to larger groups.
As I mentioned, as chairman of the DC Bar Employee Benefits Committee, we hosted several programs and several ‑‑ seven or eight programs since 2010 on the ACA and you call around town and you try to get people from the agencies to come speak to practitioners who are trying to understand these rules and help employers understand these rules, and I can say without a doubt, the IRS and Treasury have always been the most responsive of the agencies I have dealt with in making available people to help have those conversations.
*Mr. Lewis. What type of help/assistance do employers need from the IRS that hasn’t been issued yet?
*Mr. Perretta. There are sort of, I think, three really, really big issues. One is minimum value in order to determine whether or not an employer is providing coverage that will qualify as minimum essential coverage under the pay‑or‑play, so essentially how an employer decides whether or not they are complying with the obligation to provide qualifying coverage. The coverage must provide minimum value, and right now, we have a proposed sort of concept as to how minimum value will be determined, which we are very thankful for and very happy with, but I think further contours on that rule would be helpful so employers can understand their obligation.
Wellness incentives, employers are using wellness programs to a greater extent to help both reduce the healthcare trends and also to make sure their employees are healthy and wellness incentives were codified ‑‑ sorry, were addressed in regulation by HIPAA almost 20 years ago and it was codified by Congress in the ACA, and employers just want to make sure that as we move forward with wellness programs, that they are supported as a way for employers to continue to encourage their employees to become healthier.
I think those would be two of the more significant.
*Mr. Lewis. Thank you very much.
Mr. Hodge, I am somewhat curious and maybe I just want to know. You seem to be saying by the IRS helping to carry out the mandate of the Affordable Care Act, that it is helping to expand the welfare state and I want to be sure that we are reading from the same page.
Could you just tell me what is the welfare state?
*Mr. Hodge. I would include all of the means‑tested type safety net programs in addition to all ‑‑ many entitlement programs that are generally administered through HHS and so forth, and the IRS has now become an integral part of many of those welfare type programs, broadly stated, and so, yes, it is an integral part of the welfare state in providing basic assistance to people through things like the Earned Income Tax Credit and other sorts of refundable credits.
*Mr. Lewis. And do you think that is a good thing or ‑‑
*Mr. Hodge. I think it is a very bad thing actually. I do not think it is a role for the IRS to play in that. I think for the IRS to be handing out now over $100 billion worth of refundable credits is a very bad trend.
*Mr. Lewis. Well, who should play that role? What agency of the government should play that role? It is a necessary role for someone to play. Who should play that role?
*Mr. Hodge. Well, it is already being played in other areas of the government. For instance, HHS is providing that role through its assistance programs and now we have it duplicated through the Tax Code and I think that we ought to have agencies that specialize in it keep to their core missions.
*Mr. Lewis. Would other members of the panel like to respond?
*Mr. Goldberg. Mr. Lewis, I ‑‑ my first presidential appointment was from Ronald Reagan. My second presidential appointment and third were from the first President George Bush. Each of those presidents supported increases in the Earned Income Tax Credit. The intellectual birth of the Earned Income Tax Credit is Milton Friedman.
The IRS is the most efficient delivery of these kinds of incentives in the world. It doesn’t regulate. It doesn’t dictate behavior. It simply administers a pricing system. One would think that conservatives are particularly enamored, as am I, of pricing systems. The code is about our values. It is about home ownership. It is about education. It is about thrift. It is about education. It is about health. And abstract notions to get rid of all of that, I believe, are stillborn.
So I think the IRS is doing a terrific job. It is a job that was charged with by each of my bosses, President Reagan and President Bush, and I think they do it very well.
Thank you very much.
*Mr. Lewis. Thank you, Mr. Goldberg.
Madam Chair, I yield back.
*Mrs. Black. Thank you, Mr. Lewis.
And now, Ms. Jenkins, you are recognized for five minutes.
*Ms. Jenkins: Thank you, Madam Chair. Thank you all for being here.
Ms. Pickering, in your testimony you noted that the vastly different missions of the Department of Health and Human Services and the Internal Revenue Service has the potential to create taxpayer confusion and unexpected debt, tax debts, as a result of overpayments of subsidies. For example, according to HHS regs, a taxpayer does not have to file a tax return to substantiate their income level; however, the IRS will require a tax return to reconcile the advanced premium tax credit.
Can you just elaborate on the consequences of having two different standards and what recommendations would you have to ensure that taxpayers do not receive an unpleasant surprise because they improperly estimated their income?
*Ms. Pickering. Thanks for that question.
We certainly, on the frontline as we are serving our clients, see from a very real and practical experience the challenges that individuals have in navigating the complex tax laws. What we are particularly concerned about with regards to, you know, the HHS having much looser documentation requirements for establishing income and eligibility, the HHS in their mission is motivated and incented to help everyone gain health coverage and the IRS is incented to collect taxes and reconcile that premium, and so for that, we are afraid that with different standards and different confusing information, and certainly as this is a new regulation being rolled out, we will see that there are many taxpayers that have not recently or ever been required to file their taxes will now have to enter into the tax system to file their taxes to reconcile that premium and that is going to cause some frustration, some surprises, and put people into a situation where they have a tax liability through no fault of their own, certainly not through, you know, bad intentions. They just didn’t understand the regulations, estimated things incorrectly, and now find themselves owing money.
*Ms. Jenkins. Okay. Thank you. That helps.
From my understanding, current law requires that if a taxpayer’s circumstances change during the year, whether it is due to good news, like a new job or a raise, or because they lost their job, the taxpayer’s responsible for updating their information with the exchange, potentially resulting in a large overpayment or underpayment if not timely reported. The taxpayer advocate has warned taxpayers who do not update their household information during the year may find that they owe a significant amount of money at the end of the year, money they likely do not have.
Maybe, Mr. Goldberg, each of you could comment and describe how this requirement to provide notice and the IRS reconciliation process works from this perspective of just everyday taxpayers.
*Mr. Goldberg. Sure, Ms. Jenkins.
Let me comment very briefly on your prior question.
*Ms. Jenkins. Sure.
*Mr. Goldberg. I believe that the issue of forcing people to file tax returns may be less than is generally estimated. Because of the way the Affordable Care Act is structured, I believe virtually all of ‑‑ a very, very large percentage of those folks will receive health coverage through Medicaid rather than on the exchanges. There will be some exceptions and it is going to be a problem.
Stepping back, I think that we have decided to run this through the exchanges. I believe, frankly, that was a political decision because people didn’t want to call it a tax. That creates a wholly unnecessary intermediary dealing with all of the information you are talking about. They don’t know how to do it. Mrs. Black, as you alluded to, it raises serious confidentiality and privacy ‑‑ and it is just not necessary. The H&R Blocks of the world, the advisors of the world, the churches, the nonexempt or tax‑exempt organizations, the IRS, I believe will do a credible job of educating employees and purchasers on the exchanges generally how the rules work.
If you simply let the family go in and say, “Gee, I got a raise, I want to change my premium,” which families are perfectly capable of doing, it will work fine. If you say, “You have to fill out three forms and talk with four different government employees, getting passed from phone to phone before you can make the change,” they are just not going to do it.
So my recommendation is you trust the individuals and families to make that decision working with advisors, working with providers, and you will significantly reduce that problem and I believe the IRS, properly instructed by this Committee, will be reasonable in dealing with the transition, but as it is structured, it is just a bureaucratic mess.
*Ms. Jenkins. Okay. Fair enough.
Madam Chair, I yield back.
*Mrs. Black. Thank you, Ms. Jenkins.
And Mr. Becerra, you are recognized for five minutes.
*Mr. Becerra. Thank you, Madam Chair, and thank you all for your testimony. By the way, thanks for being patient with us as we went out to commemorate 9/11.
You know, I would agree with anyone who is willing to say that any time you do something big, especially in a big place like America, it is going to take a little time to adjust.
And, Mr. Goldberg, can I just say to you thank you for your constructive comments. We could be critical or critique, but at the same time, what we are hoping to do is have a functional government, and I appreciate where you point out where IRS can do better and where it is doing the best it can and I agree with you. There aren’t too many governments in the world that can say they have as efficient a system as we do. We still have to figure out how we collect on that tax gap that we got, but I got to believe that men and women who work in the IRS, who oftentimes get a lot of heartburn for what they do, are trying to do the best job they can, especially the folks that are out there trying to do the enforcement, you know, trying to find the folks who are trying to evade paying their fair share of taxes.
So I am going to be the last one that is going to sound like Scrooge and say that as we try to expand healthcare to 33 million Americans who had a heck of a time trying to afford it, that we should try to go backwards because the reality is it is not just about trying to help 33 million Americans and their families to get health insurance, quality, affordable health insurance for the first time. Actually, a lot more is at stake. There are over 100 million Americans who, beginning 2014, will never have to worry about a preexisting condition again. They all have the security of knowing that they are going to keep their insurance, and as we try to administer this program, whether through the IRS or HHS, who cares, we are trying to do something to help folks.
At the end of the day, as Mr. Goldberg, I think you said, it is trying to make sure that government works for people, whether it is the IRS or any other agency, and my sense is that if we all work together, we can make this happen.
Mr. Hodge, I am concerned when I hear people say that the IRS is taking on way too many things. It should go back to its ‑‑ I think you said something to the effect of it should go back to its core responsibilities. I don’t disagree with that except that the IRS helps people save money. Should the IRS stop providing assistance through these provisions that help people save money by encouraging them to do so and getting a tax break by doing so? Should the IRS not do that?
*Mr. Hodge. There are certain elements of the Tax Code that should be in place. We should not be taxing savings. So I don’t consider that a “tax break.” It should ‑‑
*Mr. Becerra. But we do tax it. We do tax benefits/gains that are made, people’s income, and what we do is we give people a chance to not have all their income taxed if they save some of it.
So should we not provide folks with that type of a tax credit or a tax deduction through the code?
*Mr. Hodge. We have gone way beyond that into ‑‑
*Mr. Becerra. No, I know we have. I agree with that, but ‑‑
*Mr. Hodge. ‑‑ now giving credits for replacing the windows of their home and buying an electric car and putting their kids in daycare and so forth, and so ‑‑
*Mr. Becerra. Right. So should we return to, as you say, the core mission of simply collecting the necessary amount of tax revenues the government?
*Mr. Hodge. That is right.
*Mr. Becerra. Okay. So then we shouldn’t provide ‑‑ encourage people, through a tax credit or a tax deduction, encourage them to save more money? We shouldn’t encourage them through the homeowner’s mortgage interest deduction, an incentive to purchase a home. We shouldn’t provide them with a tax credit to save money to prepare to send their kids to college.
Those are not core missions of the IRS, and from what I gather from your testimony, we are simply pure and have the IRS collect the revenues that the government needs. There are a whole bunch of Americans who would have a tougher time buying a home, saving for their kids’ college education or even saving for their own retirement, and I understand what you are saying. The further away you get from your core responsibility, the more chance that there is mischief or a mistake, but I got to believe that only Scrooge would say don’t try to package that present for that little child on Christmas Day.
There are things that we try to do to make life better. Don’t always get them right, but, as I think Mr. Goldberg was just saying, if we try to focus on doing it right, then there is a good chance that we are going to be helping a lot of Americans and in a bill that has become law, historic legislation, that now will extend protections against discrimination on preexisting condition in healthcare to 150 million Americans or so, to extend coverage to 33 million American families now. I hope that what we do is just work together, figure out how we can help the IRS make sure it doesn’t make mistakes and does it right so that when Christmas comes, everyone gets what they deserve.
With that, Madam Chair, I will yield back the balance of my time.
*Mrs. Black. Thank you, Mr. Becerra.
And Mr. Marchant, you are recognized for five minutes.
*Mr. Marchant. Thank you, Madam Chair.
When I held my town hall meetings this last break, Bedford, Texas comes to mind, the crowds pretty consistently stood and delivered one message. Please simplify the Tax Code. Please make it to where the IRS does not have as much involvement in our lives. Pretty simple message from my constituents.
When I got the briefing paper for this hearing today, which was a very good briefing paper, I was taken aback by the exact opposite. When the Affordable Healthcare Act comes into effect, the IRS is going to be even more involved in our lives. The IRS is going to be a bigger part of everybody’s tax return, and in fact, in my opinion, people that have been doing their own taxes may now have to consult with someone and pay someone to help, and in my mind, we are going exactly the opposite direction.
Yes, 33 million people theoretically will become ‑‑ have access to healthcare, but 300 million people are possibly impacted by the process that we have put in place to bring about that change.
Mr. Hodge, Deputy Commissioner Miller suggested that the process of taxpayers updating government officials about the details, the intimate details, of their personal and family lives had really nothing to do with the IRS. It was just going to be a simple calculation, a simple you fill out your return and based on what you put on the return, that was going to be the extent of the IRS’s involvement. Do you have anything to say about that?
*Mr. Hodge. Well, it looks very clear, as I understand the legislation, and especially from what Mr. Goldberg and Ms. Pickering has said, the IRS will be immediately and very ‑‑ and intimately involved in that, and if I read the briefing from the Joint Committee on Taxation summary of the ACA, it says very clearly that any adjustment to tax resulting from the difference between the advanced premium assistance and the allowable refundable tax credit would be assessed as an additional tax or a reduction in tax on the tax return. In many aspects, this will be like the Alternative Minimum Tax where it is sort of an accidental thing that people fall into when they actually fill out their tax return. It is very difficult for them to adjust their withholding in such a manner as to anticipate this situation. So they are going to be caught in this bureaucratic quagmire between HHS and the exchanges, which could make a mistake, and their own changes and their own situation, and then the IRS that has to rectify these.
It is ‑‑ I feel sorry for folks that are going to get caught up in this and they will end up on April 15th realizing a tax burden that they may not have seen coming and that is pretty frightening.
*Mr. Marchant. Mr. Goldberg, do you see ‑‑ you made the comment earlier that business and individuals are very responsive to the Tax Code and they will sit down, they will figure it out. Do you see the opportunities for additional tax avoidance in the way these forms are filled out or do you see people’s behavior being altered? Do you see them sitting down with their accountant saying, “Okay, we may have filed this way before, but because of the new rules, we are going to decide to file this way?” And, in fact, the Alternative Minimum Tax is an excellent example from my district because that’s the number one thing in the Tax Code that catches my constituents.
Will it alter the behavior of taxpayers?
*Mr. Goldberg. Yes, sir, I believe that it is a certainty. For example, if you have a young kid off on his or her own who is healthy, someone, I guarantee you, will tell her, “You can either pay $400 to the IRS or you can pay $3,000 to the exchange or you can wait and when you get sick, you can buy an insurance policy because there is no preexisting conditions. So you can save 2,600 bucks a year till you get sick.” That is going to happen for sure.
So, yes, of course, and I think that is just human nature. That is ‑‑ I mean you see nothing but human nature if you are running the IRS, better and worse.
The important point I think that Congress needs to keep in mind is if you say you want to maintain private markets for health insurance and if you say I want to subsidize the cost of insurance for those who have difficulty paying, you have just said I want some form of phased‑out credit. That is what you have just said, otherwise you can give everybody $25,000 and tell everybody to go buy insurance and tax it at the back end. That would actually work, but otherwise, you are stuck with this question.
I personally think the structure of the Ryan proposal, setting aside the numbers, in many ways is a terrific structure. It was first supported by President Clinton, but it has the same question. How are you going to get progressive, subsidized subsidies from the government to buy health insurance? See, you got the same question any way you go. You got the same issues, and I believe the choice is very simple. For all of its problems, you either let the IRS administer those kinds of progressive credits or you get somebody else to do it, and I think it is a more prudent choice to let the IRS do it, but you can’t avoid the choice. You go to single‑payer, you avoid the choice, but otherwise, I think you are stuck with it.
You are absolutely right about the behavior. The Tax Code today is grotesque. It is repulsive. It is so unneedlessly complex (sic). In terms of issues, your colleague across the capitol, Senator Coburn, is a profile in courage for calling out some of the needless subsidies provided by the Tax Code. You guys could do a terrific job to strip it down. Healthcare, progressive subsidies, phased‑out credit, you are stuck where you are, whether it is Congressman Ryan or whether it is the Affordable Care Act. That’s what I ‑‑
*Mrs. Black. And thank you, Mr. Goldberg. The time is expired. Thank you, Mr. Marchant.
And I think, barring anyone else walking in the door, it looks like we are at the end, and I just want to go back to a question that I asked to the previous panel, Mr. Miller, related to the amount of information that is going to be in so many different places having to do with the taxpayer’s personal information so much more than we have ever known before and that is a real concern for me.
I mean obviously right now the IRS does share some of this data with Child Support, some with Medicaid, and maybe some other cases of revenue collection, but now we are going to see it much broader. We are going to see it where the exchange employees with vast amounts of information that they haven’t previously been privy to, and I want to know from your perspective, each of you, if you have the same concern that I have, especially given the fact, as I said in the previous panel, that what we have seen in this Committee, as we have had the IRS hearings, that we know that there is fraud out there. There are people who have gotten refunds that didn’t belong to them, and are ‑‑ do you have a concern about where we are going with this?
Mr. Goldberg, I want to start out with you and if we can just go down the panel, that would be great.
*Mr. Goldberg. Yes, I share the concern. It is one of the greatest concerns about the Affordable Care Act. The easiest solution is to take the exchanges out of that business.
*Mrs. Black. Thank you.
*Ms. Pickering. Yes, I share that concern as well. We know that the IRS works very hard to protect taxpayer information. In working with HHS and the exchanges now, there is going to be a broader exchange of information, and while I believe everyone works to the ‑‑ you know, to the best of their ability with the best intentions, there is just so much more opportunity and the fraudsters and the criminals are getting so much more clever in their ability to propagate these fraud schemes. So I think there is exposure and vulnerability.
*Mrs. Black. Thank you.
*Mr. Hodge. Yeah, I too share that and I am sure every taxpayer fears their information getting out. They do so when they fill out a credit card application, a health plan. Everything is now accessible to these hackers and I would think everyone would worry that the more you disseminate this kind of information, personal information, the more vulnerable it is to that kind of mischief.
*Mr. Perretta. Thank you. I certainly support the comments of my fellow panelists here.
I can’t help but say a couple things from the perspective of the Council, which is employers are obviously very focused on employee privacy and, you know, one of the issues that employers were concerned about was the issue of having to figure out whether their health coverage was affordable because that is relevant to figuring out whether the employer has to pay a penalty, and most employers don’t know what their employees’ household income is and most employees don’t want to tell their employers what the household income is, and thankfully the IRS listened to the Council and the employer community and they came up with the Safe Harbor Rule, which lets employers base affordability on the employee’s W‑2 wage, which is something that the employer will know, and so it does go a little bit to your point, Chairwoman, about the issue of privacy.
Another issue I do want to touch on while I have your attention is the issue of notice and disclosure and this goes a little bit to the issue of flowing of information from parties, and I think employers, both small and large, are obviously concerned about the burdens that are going to fall upon them in terms of having to transmit, collect, store information as part of their obligations under the ACA and I think as the IRS moves forward, they have been very thoughtful in reaching out to us to understand sort of what our concerns are, but that is obviously an area where working closely with the employer community would be helpful since the employers will bear a significant piece of that burden in making sure that information flows in the right way.
*Mrs. Black. Thank you.
Ms. Pickering, I have one additional question, one final question for you, and this goes back to the comment that you made both here and also in your written testimony about the concerns as preparers and getting your ‑‑ the folks that work for you educated on what they are going to have to be doing as far as the rules go and I would like for you just to expound a little bit about how if we don’t get those final rules in a timely manner, how this is really going to affect those who will be preparing those taxes for folks/the clients that you will be seeing?
*Ms. Pickering. We have got a number of factors going on there. The Registered Tax Return Preparer Initiative is a very important initiative for getting all professional tax preparers registered with the IRS and up to ‑‑ you know, up to standard competency levels. This is something that we have always supported. We think it is important for the professionalism of the industry, and in there, there is a continuing education requirement as well which says that preparers need to stay current on tax law.
Now, as the ACA is rolling out as well, our clients will be coming to us looking forward to some additional understanding at least a minimum what are the tax implications to them with regards to the healthcare implementation and it is very important to have timely regulations so that all of that can be incorporated into the training plans and getting people prepared.
So the timing of these things is critical and it is, you know, certainly a daunting task, but one that we look forward to partnering with the IRS on.
*Mrs. Black. Well, thank you.
*Mr. Perretta. Could I just add a follow‑up comment?
*Mrs. Black. Yes.
*Mr. Perretta. Just to the idea that ‑‑ going on that point, employers are often pricing their health insurance coverage 12 to 14 months in advance.
*Mrs. Black. That is right.
*Mr. Perretta. And so when you think about having coverage in effect for 2014, many employers are beginning to fashion that coverage and make decisions about what that is going to look like, what their subsidies are going to be, and obviously playing on that point about the timely information, really the sooner the regulations can come out, obviously with opportunity for notice and comment, the better.
*Mrs. Black. Absolutely, and I know I am also hearing this from the insurance industry as well. Everybody’s waiting for those final rules and regulations, almost that they need them yesterday in order to be able to give advice to their clients or those that are buying the product.
Once again, I want to say thank you to the panel for your patience today and thank you for all of the good information that you provided to us.
This hearing is completed.
[Whereupon, at 12:20 p.m., the subcommittee was adjourned.]
Public Submissions For The Record
Timothy Stoltzfus Jost
William G. Schiffbauer