Paul L. Caron

Tuesday, March 30, 2010

The IRS Has Sufficient Administrative Authority to Enforce ObamaCare's Individual Mandate

Following up on this morning's post, Joint Tax Committee: IRS Lacks Authority to Enforce ObamaCare's Individual Mandate:  Tax Profs Ted Seto and Bryan Camp argue that the Joint Committee on Taxation overstated the limitations on the IRS's ability to enforce ObamaCare's individual mandate:

Theodore Seto (Loyola-L.A.):

In its Technical Explanation of the Revenue Provisions of the Reconciliaton Act of 2010, as Amended, in Combination with the Patient Protection and Affordable Care Act, the Joint Committee staff states the following with regard to the penalty for failure to comply with the Act’s individual insurance mandate: “The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.” This has led some to ask how the penalty will be enforced.

What new Code § 5000A(g) actually provides is:

(1) IN GENERAL.—The penalty provided by this section shall be paid upon notice and demand by the Secretary, and except as provided in paragraph (2), shall be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68.
(2) SPECIAL RULES.—Notwithstanding any other provision of law—
(A) WAIVER OF CRIMINAL PENALTIES.—In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.
(B) LIMITATIONS ON LIENS AND LEVIES.—The Secretary shall not—
(i) file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty imposed by this section, or
(ii) levy on any such property with respect to such failure.”

Chapter 68, subchapter B is part of subtitle F. The staffer who wrote the relevant portion of the Technical Explanation was probably writing in haste.

What the new statute does prohibit is collection by levy. The question is whether the IRS can collect assessed penalties other than by levy. At the very least, it would appear that, under Code § 6402(a), the IRS can offset taxpayer's penalty against any refund to which she might otherwise be entitled. Indeed, under common law principles, see United States v. Munsey Trust Co., 332 U.S. 234 (1947), the United States can offset an unpaid penalty against any amount otherwise due from the United States to taxpayer.

It would appear, nevertheless, that the prohibition against enforcement by levy is likely to create significant administrative difficulties. The individual mandate does not become applicable until January 2013. Presumably, Congress will enact a technical correction to resolve the enforcement question some time between now and then.

Bryan Camp (Texas Tech):

I do not understand the claim in the JCT that the IRS cannot enforce the individual mandate. The JCT Report says, bluntly, that the “excise tax” imposed by new  § 5000A “it is not subject to the enforcement provisions of subtitle F of the Code.” While Congress may have “intended” that result (whatever it means for Congress to “intend” anything), the language used in the statute does not support the JCT’s claim.

Section 5000A(g) says that the penalty “shall be assessed and collected in the same manner as an assessable penalty.” Section 6671, in turn, provides that assessable penalties “shall be assessed and collected in the same manner as taxes.” Accordingly, unless otherwise restricted, the IRS has its entire tax collection arsenal at its disposal to enforce the penalty. Section 5000A(g) removes three weapons from the arsenal. First, it prohibits the government from prosecuting noncompliant taxpayers criminally. Second, it prohibits the IRS from using its administrative levy powers. Third, it does not allow the IRS to file a Notice of Federal Tax Lien.

Even without those three tax collection weapons, the IRS has at least three remaining powers to enforce collection of the penalty, once it makes a proper assessment. First, the IRS has the power to offset any tax overpayment made by the taxpayer against the penalty. Section 6402 allows the IRS to set off any overpayment (generally, that means tax refund) against “any liability in respect of an internal revenue tax.” Is the penalty “a liability in respect of an internal revenue tax”? Well, unless the courts tell us otherwise, Congress has said it is. The Health Care bill itself calls it an excise tax. Perhaps more importantly, however, the Health Care bill treats the penalty as an assessable penalty and § 6671 says that the term “tax” also includes assessable penalties. Either analysis brings the penalty under the § 6402 statutory setoff powers.

Even if the penalty is NOT a tax, however, the IRS can still use setoff powers to collect it. That is because the Service has both a statutory and a common law right of set-off. That is, “the government has the same right which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him." United States v. Munsey Trust Co., 332 U.S. 234, 239 (1947). For example, in Cherry Cotton Mills v. United States, 327 U.S. 537 (1946), the taxpayer was due a tax refund but the IRS instead applied that amount to a non-tax debt that the taxpayer owed the Reconstruction Finance Corporation (that debt arose from a loan given the taxpayer). The Supreme Court approved that use of the set-off power as between a tax overpayment and a non-tax debt.

The second remaining collection weapon is the tax lien. Section 5000A(g) does not prevent the tax lien from arising; it says only that the IRS cannot file a Notice of Federal Tax Lien. Section 6321 provides that the tax lien itself arises automatically as a matter of law when the IRS assesses a tax, sends the taxpayer a notice and demand for payment, and the taxpayer fails to fully pay. At the time it arises, the tax lien is secret, so Congress does not allow the IRS to enforce the tax lien against certain types of creditors until the IRS puts the public on notice about the tax lien by filing a Notice of Federal Tax Lien. Nonetheless, the tax lien will arise and will attach to “all property or rights to property” belonging to the taxpayer. That includes the taxpayer’s home and any future property that the taxpayer acquires, such as inheritances. See generally Drye v. United States, 528 U.S. 49 (1999) (taxpayer’s disclaimer of inheritence under state intestacy laws could not defeat attachment of federal tax lien, which was then enforceable against the person who received the disclaimed property per state laws of distribution and descent); United States v. Craft, 535 U.S. 274 (2002) (tax lien attaches even to tenancy-by-the-entireties property held by the taxpayer with his non-liable spouse).

The third remaining collection weapon is the lien foreclosure suit. Section 7403 allows the IRS (represented by the Department of Justice) to file suit in federal court to foreclose the tax lien as against any property to which the lien has attached.

In sum, § 5000A(g) does impose some important restrictions on the IRS but does not remove them all. While it does not let the IRS to enforce the tax lien as against certain types of creditors, the lien will still exist. Similarly, while it does not allow the IRS to enforce the tax lien by administrative seizure, it does not prohibit court action. Now, it is a fair question to ask whether enforcement of the tax lien is worthwhile to the government without the ability to file a public notice of the federal tax lien or conduct administrative seizures. But the answer is not open and shut. More importantly, section 5000A(g) does not impose any restrictions on the IRS powerful offset powers, which are cheap and easy to use.

Whether it is wise for Congress to ask its tax agency to enforce the Health Care bill at all is a different question, which I do not here address.”

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@ Jake: I completely agree with you. It is very unlikely that DJ will agree to institute a lien foreclosure suit JUST to collect the penalty. I also agree that removing the Service's ability to file NFTLs and to issue administrative levies takes away two very powerful collection tools.

However, like levies and NFTL filings, setoffs are also done automatically, by computer, and will be quite effective in collecting the penalty. That was my main point, but being a prof., I just had to go into that other stuff too.

Also, if there are enough OTHER liabilities, then DJ will file suit and collect the penalty along with the other liabs. But that will also be comparatively rare.

Frankly, I am not really sure how big the population of taxpayers will be who get hit with penalties. On my cursory reading of the bill, it seems like a really small group of people.

Cheers, -bryan camp

Posted by: Prof Camp | Mar 31, 2010 8:34:21 AM

With all respect to Professor Camp, if the statute prevents the IRS from recording federal tax liens against the property of citizens who decline to pay the sum due under the individual insurance mandate, the notion that the DOJ Tax Division can collect any money in a systematic and meaningful way by filing lien foreclosure suits, as a subordinate lienholder (perhaps several times over) is a pipe dream.

Posted by: Jake | Mar 30, 2010 6:39:48 PM

Suppose the Democrats mandated that I purchase a GM car, pay on it for four years before receiving it, and then pay another six years for it. Would there be any problem with the IRS enforcing that? What's the difference between that purchase mandate and a mandate to purchase medical insurance?

The ultimate deciders of the Constitutionality of the insurance mandate will be the American people, who may stiffen up and resist.

Posted by: Woody | Mar 30, 2010 5:44:25 PM