We now understand just how bad the IRS has become in the United States. We are aware that the agency illegally harassed existing conservative groups and illegally discriminated against would-be conservative groups applying for tax exempt status during the run-up to the 2012 elections.We are aware that the agency wastes vast sums of taxpayers’ dollars on boondoggle conferences, including at least one that featured its employees dressed up as Star Trek characters. That is all part of the recent past.
More ominous are expectations about the future. A July 2012 report by the Inspector General for Tax Administration stated that ‘the IRS needs to make improvements to stop billions of dollars in fraudulent or improper tax refunds resulting from identity theft and erroneous claims for tax credits.’ Although this statement does not specifically address the implications of Obamacare, that is where the IRS cess-pit truly will open up.
Let us put the pending crisis into perspective. The IRS claimed that it could not handle an increase of 1,700 applications for tax exempt status, and that spurred its targeting of conservative groups. Under the Affordable Care Act, premium subsidies – the tax credits in Obamacare designed to defray the cost of purchasing health insurance – will go to some estimated seven million tax filers and flow to households earning as much as $94,000 a year. The credits are advanceable and refundable, meaning that the IRS will pay them first and verify the claims later: what some call pay and chase.
The IRS has never been able to handle refundable tax credits in other programs. A lot of such payouts go to households inappropriately and are never pulled back. The Earned Income Tax Credit is a good example. The Treasury department’s inspector general for tax administration reported in April 2013 that improper payments accounted for 21 to 25 per cent of total EITC payments in 2012.
If we apply that percentage to the approximate $1 trillion that will be spent on Obamacare credits in the decade beginning in 2014, the math shows that between $210 billion and $250 billion will be distributed to ineligible households. Since the IRS has no system in place to verify reported households income, most these outlays will never be reclaimed.
Hat Tip: Orrin Hatch, ‘Think the IRS Is Bad Now? Just Wait’, The Wall Street Journal, June 15, 2013