Explaining the Health Insurance Penalty

Accountants and tax preparers complain that they have been put in the position of enforcing the Affordable Care Act’s insurance mandate without compensation or training as health insurance agents. They are absolutely correct and this system has produced in some bizarre results.

This was illustrated when one accountant wrote to me “I have clients that the insurance premiums are higher than what the penalty is….and even if the person used the insurance, the deductible is $3000. How do I convince someone to get insurance in that case?”

I responded:

Recognize that argument only makes logical sense under three conditions: a) you value the insurance at $0 or some other minimal amount,  b) your cash flow dictates that your goal is to minimize outflow, or, c) you have little to lose in terms of financial assets and future income that could be levied to pay medical claims. Certainly there are plenty of people that this applies to, however, my point is that in many cases the decision to go uninsured is not based on logic but perhaps emotion or ignorance instead.

We can conclude that the social purpose of a phased-in increasing penalty is to allow time for the public psyche to recognize and adjust to these thinking patterns, a process that takes years. But in the end, the only penalty that makes sense from a social policy perspective is one that exceeds the cost of compliance.

So it it not fair to criticize accountants for their lack of insight into the many aspects of health insurance – like these social policy issues and actuarial calculations in changing social behavior – that take insurance professionals decades to master. For now, I think that insurance executives should simply say “thank you for your volunteer services in helping sell our products”.

How to deal with an IRS penalty

dont-stress-smallThe IRS issues about 50 million taxpayer penalties each year to the pool of about 100 million taxpayers who file returns. That would 1 out of every 2 filers if the penalties were evenly distributed! In reality, multiple penalties are bundled together and assessed against fewer taxpayers. Yet the number of automated tax penalty assessments for additional taxes is rising each year and this trend is predicted to continue. This harsh realty of tax penalties stands in sharp contrast to the published statistic that only 1 of every 100 tax returns of ordinary middle income taxpayers is audited. Statistics can lie, and this is a good example.

The main point here is that when you receive a penalty assessment letter from the IRS in the mail, the statistics do not matter. All that matters is that your tax return is being challenged. Your blood pressure increases. Your sleep quality may decline. You feel both angry and confused.

What you don’t realize in the moment is that these matters can be routinely handled and that many of these penalties reduced or dismissed. The IRS has many reasonable and fair (sometimes even generous) procedures and programs to resolve these penalties. The key in this situation is to control the emotion and simply deal with the examination in a logical and legal method that will result in the best outcome.

In most cases it makes sense to hire a professional who is well-equipped to deal both with the IRS and with you in your current difficult stressed-out condition (even if you don’t think you are difficult to deal with). Unfortunately, I’ve seen plenty of examples of settlement cases where the tax professional was technically competent but the settlement process failed primarily because the taxpayer was not acting reasonably and the professional was unable to communicate that point effectively. Even for a unemotional taxpayer, it can take longer to learn about IR procedures that is is worth and it is simply cheaper and more effective to hire a representative.

Typically the first question I get from a taxpayer facing a threatened tax penalty is “Do I need a lawyer?” In most cases the answer is , in non-criminal cases it dos not make sense to retain a lawyer from the outset. A skilled Enrolled Agent (EA) or Certified Public Accountant (CPA) is a better choice for handling routine tax penalty issues both from a skills/tasking match-up as well as the cost/benefit perspective. The best approach is to work with an EA of CPA who works in close communication with a tax lawyer. In some cases you may benefit from the lawyer’s input without ever retaining or paying for a lawyer. Then, in the slim chance that the settlement process goes terribly poorly, you have easy transition to help from a tax lawyer.

To help with these potentially stressful tax penalty issues, I offer both a free telephone consultation without document review as well as a flat fee consultation that includes document review and written follow-up. Find more information on the “services” tab above.

I’ve helped resolve several simple tax penalty matters have been dismissed quickly for a $300 fee after a single telephone consultation and written follow-up with IRS but others drag on and cost more.