IRS Tax Credit Scandal A Bad Omen For Obamacare

Posted: Oct 28, 2013 7:35 PM
Under Obamacare, the Internal Revenue Service will determine who is eligible for health insurance subsidies, and it will deliver those subsidies, in the form of tax credits, to millions of individual Americans. It's a huge job, and a critical one, involving hundreds of billions of taxpayer dollars. So it should go without saying that the subsidies go only to people who actually qualify for them. But a new scandal within the IRS casts serious doubt on whether that will happen.

The scandal involves a program known as the Earned Income Tax Credit. It is an anti-poverty program in which the government gives low-income workers a tax refund larger than their tax liability. For example, a family with a $1,000 income tax liability might qualify for a credit four times that large, and receive an Earned Income Tax Credit payment of $4,000. Another family with no income tax liability at all might qualify for the same lump-sum payment. Call it a subsidy, a refund, a transfer payment -- in any case, the family receives a check from the feds.

The government sends out between $60 billion and $70 billion a year in Earned Income Tax Credit payments. Now, a new IRS inspector general's report shows that a huge amount of that — anywhere between 21 and 30 percent, depending on the year — has been given out improperly to recipients who do not qualify for the payment. The inspector general estimates that somewhere between $110 billion and $132 billion -- billion, not million -- has been given away in improper Earned Income Tax Credit payments in the last decade.

It's long been known that the IRS throws taxpayer dollars away through tax credits. President Obama, who has sought to expand the Earned Income Tax Credit program, in 2009 signed an executive order entitled "Reducing Improper Payments and Eliminating Waste in Federal Programs" that required the IRS to come up with annual "improper payment reduction targets." That was four years ago. It still hasn't been done.

Don't look for it to be done anytime soon. IRS officials told the inspector general that the program was too complicated to administer correctly, and even if it were less complicated, they would not want rigorous enforcement measures to discourage legitimately qualified people from applying for the credit. In the words of the inspector general's report: "The IRS cited the complexity of the Earned Income Tax Credit program as well as the need to balance the reduction in improper payments while still encouraging individuals to use the credit as the two main reasons why reduction targets have not been established."

Given that, inspector general Russell George concluded, "The IRS is unlikely to achieve any significant reduction in Earned Income Tax Credit improper payments." So, look for billions more to be wasted in improper payments this year. And next year. And so on.

This is the very same IRS that will administer Obamacare's subsidies and penalties. Does anyone doubt that in coming years the IRS will use the same excuses -- complexity, a desire not to discourage qualified recipients -- to explain its lack of enforcement, or perhaps refusal to enforce, Obamacare's requirements?

The process has already begun. Back in July, the Obama administration announced it will not require state-run Obamacare exchanges to verify whether individuals who receive subsidies for health coverage are actually qualified for those subsidies. The administration will rely instead on an honor system in which it accepts an applicant's word that he or she is eligible -- a decision many analysts call an invitation to fraud.

In September, the Republican-controlled House passed a bill to require verification for all subsidies. This month, a much weakened version of that proposal became part of the settlement of the government shutdown. But the bottom line is, don't expect the federal government to do much checking on who is receiving subsidies.

And even a stringent verification requirement will not work if the IRS decides not to enforce it for fear of discouraging people who legitimately qualify for Obamacare subsidies. Since that has been the case with IRS non-enforcement of the president's executive order covering improper Earned Income Tax Credit payments, is there any reason to believe the IRS would not use the same rationale for Obamacare?

Right now the public debate over Obamacare is consumed by news of the exchange website's failures. It's a serious situation that could have a long-lasting effect on the system. But at some point the administration will fix its technical problems. And then the news can move on to the next stage of Obamacare dysfunction -- like a new scandal with the IRS and subsidy payments.

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