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President Trump and the IRS May Butt Heads Over Obamacare

By Sean Williams - Oct 30, 2017 at 6:21AM

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Millions of uninsured Americans could be in for a surprise this tax season.

When President Trump was elected in November, it was widely believed that the hallmark healthcare legislation passed by Barack Obama, the Affordable Care Act (ACA), which is perhaps best known as Obamacare, would soon be no more. A core component of Trump's election hinged on his promise to repeal and replace Obamacare, which he saw as responsible for lining insurers' pockets and increasing healthcare costs for the average American.

But more than nine months after Trump took office, the ACA remains the healthcare law of the land, and it looks as if it'll stay that way until budget discussion kicks off for the next federal fiscal year.

President Trump addressing Congress.

Image source: President Donald. J. Trump's official Facebook page. Photo by Shealah Craighead.

Trump goes nuclear on Obamacare

The inability to pass healthcare reforms in Congress has made the president none too happy, which is why he's done everything in his power since taking office to coerce cooperation on reforms from lawmakers.

Most recently, Trump announced that he would be ending cost-sharing reductions (CSRs), which are a key subsidy that more than 7 million people qualified for at the end of the 2017 enrollment period. Cost-sharing reductions are subsidies that help lower the cost of copays, coinsurance, and deductibles tied to going to the doctor. While Advanced Premium Tax Credits still apply and can help lower the cost of monthly premiums, having their premiums paid will be of little help to low-income folks if they can't afford the copays and deductibles associated with receiving care.

Trump had been tinkering with eliminating CSRs for some time. Republicans had won a lawsuit over CSR payments against the former Department of Health and Human Services, Sylvia Burwell, in 2016. The lawsuit alleged that only Congress could apportion CSR funding, and it had not been doing so. Federal Judge Rosemary Collyer agreed and sided with the GOP, although she immediately stayed her decision, knowing full well that the Obama administration would appeal. That appeal has carried over to the Trump administration, and the president had been using it as a dangling carrot to coerce cooperation on Capitol Hill over healthcare reforms. With that not happening, Trump recently triggered his nuclear option for Obamacare by dropping the appeal and ending CSR funding. 

An IRS tax agent going through paper returns at his desk.

Image source: Getty Images.

Are Trump and the IRS about to butt heads?

But the most interesting Obamacare news this past week might just come from the Internal Revenue Service (IRS), which announced a major tax change for the upcoming tax-filing period that could affect millions of Americans and put them on a collision course with President Trump.

According to a statement from the IRS to tax professionals, the tax regulatory agency will not accept electronic filings for the 2018 filing season (concerning your 2017 taxes) that don't indicate whether a taxpayer had healthcare coverage, and if not, whether they paid the Shared Responsibility Payment (SRP). The SRP is the penalty consumers are supposed to pay if they don't purchase health insurance, and it's the greater of $695 or 2.5% of modified adjusted gross income. The IRS also stated that paper returns would be suspended without this information. 

The IRS had warned that it was set to increase enforcement of the ACA's penalties before last year's tax season, while Barack Obama was still the president. However, one of the very first executive orders Trump signed once in office was a measure that "minimized the economic burdens" on Obamacare.  No one exactly knew what that meant at the time, other than that Trump disliked the ACA and wanted it repealed. However, one outcome of this order was that the IRS changed its hardline stance on not accepting tax filings with line 61 left blank (that's the line where you indicate whether you're covered or how much you paid in penalties) in the 2017 filing season. This allowed taxpayers to submit forms without indicating their coverage during the most recent tax season.

IRS tax form 1040 with a pen and calculator.

Image source: Getty Images.

In the upcoming year, though, things are changing. The IRS is once again putting its foot down, digging in its heels, and readying to collect penalties for consumers who didn't purchase health insurance. This would seem to contradict Trump's executive order, but given that I'm no lawyer and the order itself is pretty vague, it's tough to see how Trump would fight the IRS's tougher stance in the upcoming tax season. Nevertheless, a battle may ensue between Trump, who is trying to coerce healthcare reforms, and the IRS, which is set to uphold the mandates and penalties associated with Obamacare.

The Shared Responsibility Payment is mostly a disappointment

Despite this tougher stance on the ACA's mandates and penalties, a number of consumers without health insurance will still find a way not to owe a dime in SRP during the upcoming tax season.

For instance, there are well over a dozen exemptions to the SRP, of which income is probably the most commonly used. If purchasing health insurance is deemed unaffordable, you won't owe a cent in penalties. Similarly, there are a number of hardship exemptions, including medical expenses you can't pay for, a recent bankruptcy filing, or even the recent death of a family member. While you'll need to prove these hardships to the IRS, quite a many uninsured folks won't pay a penalty this tax season.

A young woman shrugging her shoulders.

Image source: Getty Images.

Even for those folks who aren't exempt, there's no guarantee that the IRS will collect anything in penalties. The IRS isn't allowed to garnish wages or seize property if a taxpayer owes the SRP and fails to include payment. In effect, the tax agency's only ammunition is to deduct the SRP from a federal tax refund, should one be owed, or to send a notice to the taxpayer requesting payment. Essentially, folks who owe the SRP could ensure they're not owed a refund and possibly skirt any responsibility. Though the IRS could take you to court over your owed SRP, it's unlikely to do so with possible hundreds of thousands, if not millions, of similar instances around the country.

The SRP itself has also been a major disappointment. Designed to encourage healthy young adults to purchase health insurance with the threat of a financial penalty, the penalty itself is nowhere near the cost of a full year of coverage. The Kaiser Family Foundation estimated a $969 household SRP for 2016, but HealthPocket finds that the average unsubsidized bronze-plan consumer around the country paid more than $3,700 in full-year premiums this year. There's been little reason for healthy young adults, whose premiums are needed to insure the stability of the healthcare system, to enroll.

It's unclear what the future holds for the SRP or Obamacare as a whole, but the upcoming tax season could be interesting, to say the least.

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