How Obamacare Foes Will Game the System

Jeffrey Dorfman, at Forbes, draws up the plan for how foes of Obamacare and people who enjoy taking advantage of such poorly-designed government programs will game the system. Excerpts:

[T]he law is almost perfectly designed for tax fraud. This tax fraud, which will be at least somewhat legal, will happen in two stages.

First, the way the Obama administration is implementing the law allows people to state their income with little to no verification. By stating a low income, people can qualify for a large subsidy which gets paid in advance. When people receiving subsidies file their taxes in , if it turns out their income was higher than they originally stated, you might think they would then have to repay the subsidy.

But now we get to the second part of the tax fraud. Under the law it is not only difficult for the government to get its money back, in some cases it is legally impossible. There are two limits on the ability of the IRS to collect the overpayment.

The IRS is not allowed to place a lien on your property or garnish your wages in order to collect money owed under Obamacare. This applies to both overpayment of subsidies and to the penalty for not purchasing insurance at all. That means unless a person voluntarily pays what is owed the IRS can only collect money from people who would otherwise be owed a refund on their taxes. If someone owes money either for not purchasing insurance or overpayment of a subsidy, the IRS can deduct the amount owed from the refund the person would have received. If they are not owed a refund large enough to collect the entire amount, there is nothing more the IRS can do.

In addition to the above difficulties that the law places on the IRS, the law also limits the amount of any subsidy overpayment that must be repaid under any circumstances (look at the very end of the law in this link). In other words, if a person lies about their income in order to collect a larger subsidy, there is a good chance that they legally can keep at least some of the overpayment.

For example, for a family with actual income of less than 200 percent of the poverty line (around $47,000 for a family of four), the most that must be repaid is $600. If the family’s income is as high as $115,000, they still cannot be forced to repay more than $3,500.

Given that the Obamacare subsidies for a family of four can easily be $10,000 or more the difference between what is paid as an undeserved subsidy and the amount that must be repaid could be quite large.

Recent reports have described how the IRS has been paying $4 billion per year in fraudulent refunds filed by thieves who didn’t even do a particularly good job of disguising the fraud. The IRS was also found to have paid over $110 billion in fraudulent earned income tax credits over a decade. Thus, tax fraud is a major problem already and Obamacare seems almost to be intentionally designed to make tax fraud easy.

Obamacare is going to be one of the largest government programs we have as measured by spending, with most of the spending occurring through the subsidies designed to make insurance affordable. Yet the program is designed in a manner that invites tax fraud on a massive scale. Just understate your income, arrange your withholding so you are not due a refund, and keep your subsidy overpayment with no fear of reprisal.

Given that an entire industry has grown up helping people commit tax fraud using the earned income tax credit, we should expect a similar phenomenon to arise around the Obamacare subsidies. If the IRS cannot minimize fraud when they have the full range of their enforcement powers, how bad is the fraud going to be when the IRS has both hands tied behind its back?

The news from , in the waning days of the Zelaya regime in Nicaragua, included notes about U.S. citizens there who had been imprisoned for refusing to pay a war tax:

Imprison Americans Who Refuse to Pay War Tax

Business Men in Nicaragua Called on to Contribute to Fund — Forced to Pay Way Out of Jail

 A cablegram from Panama today says that Edgar S. Harris of Columbus, O., an American commercial traveler in Central America, declares that several Americans are in jail at Managua and other places in Nicaragua. Every American in business in Nicaragua who refused to contribute to the war fund levied by Zelaya was promptly arrested and thrown into prison, Harris says. A few Americans bought their way out of jail by paying the price demanded. Harris says it is unsafe for an American to appear in the section of Nicaragua controlled by Zelaya.

I posted another dispatch from this same tax resistance campaign back in .

Back in , the IRS sent me a letter telling me that they’d changed some of the numbers on my tax return: raising my adjusted gross income and taxable income by a couple hundred dollars, but lowering my self-employment tax by over $350. I figured I’d probably screwed up somewhere in my spreadsheet, maybe forgetting to update a previous year’s equation somewhere, and so I wrote back to ask them for the details of why they made the corrections they did: what component of my adjusted gross income they increased and why, what part of my tax calculation they adjusted and why (this information was not part of their original letter to me).

Not a very complicated question to answer, you’d think. But since then they’ve sent me two letters on the matter, the latest of which arrived today, over four months since my query. Both essentially say they haven’t had time to get around to it yet.

I expect that most everyone dealing with the IRS is getting this sort of glacial service these days, which ought to help to improve levels of taxpayer resentment and unwillingness to cooperate.