The Insurance Market Regulations in the Republicans’ Health Care Bill: Crippling Obamacare, or Passing a Hot Potato to State Governments?

By David Gamage

On Monday, the House Republicans finally revealed their draft bill to “repeal and replace” the Affordable Care Act (#Obamacare or #ACA). The bill is titled the American Health Care Act, and commentators have been referring to it as either the #AHCA or #Trumpcare.

To assess the bill, it is helpful to think of it as consisting of four primary buckets:

  1. ending many of Obamacare’s tax provisions (read: large tax cuts for the very wealthy);
  2. phased-in cuts to Medicaid funding and scheduled devolution of Medicaid to the states (read: eroding the health safety-net program for the poor);
  3. transforming Obamacare’s other major health subsidies from being based mostly on income and health costs to being based more on age (read: the implications of this are actually less straightforward than what much of the commentary suggests, but that is a topic for another day); and
  4. other changes to Obamacare’s insurance market regulations (the subject of today’s blog post).

In this blog post, I will focus on the fourth bucket—the changes to Obamacare’s insurance market reforms other than the changes to the subsidies. Time permitting, I hope to write future blog posts on some of the other buckets.

What is most striking about the AHCA’s insurance market changes is how they keep the vast majority of Obamacare’s reforms in place. Right-wing groups have thus taken to calling the AHCA “#ObamacareLite”. Yet I consider this a misnomer. A more accurate label would be #ObamacareCrippled.

The AHCA’s changes do not really water down Obamacare, as the intended slur of “ObamacareLite” implies. Rather, the AHCA’s changes would likely cause Obamacare‘s framework for regulating the individual market to fall apart. If the AHCA bill were to be enacted in its current form, the result would likely be adverse-selection death spirals. The only real hope for saving the individual market would be for state governments to step up with new state-level regulations for supporting insurance markets within each state.

Continue reading “The Insurance Market Regulations in the Republicans’ Health Care Bill: Crippling Obamacare, or Passing a Hot Potato to State Governments?”

TaxSlayer: Technically Acceptable for VITA Returns?

Adam C. Mansfield
Staff Attorney, Legal Services for Students, University of Kansas

The first time I logged into the TaxSlayer training lab I knew that this tax season was going to be a problem. It became obvious when I typed “1040NR” into the form lookup box in the upper left corner of the TaxSlayer screen and the search came up empty. Next I tried “1042-S” and “8843.” Same result. Now I’m not some old fuddy-duddy that doesn’t like change.  I love working with new gadgets, software, or operating systems—as long as it does what it is supposed to do.

I work for Legal Services for Students at the University of Kansas. The main target population for our Volunteer Income Tax Assistance (VITA) grant is nonresident alien (NRA) students and scholars.  Every tax year we help hundreds of international students and researchers determine their residency status, calculate any applicable tax treaty benefits, and prepare their federal and state returns. In the past, TaxWise has worked just fine for this purpose.  I had no problem preparing a return for the student from Bangladesh who had income in both Kansas and Missouri or the Chinese student who has multiple 1042-S forms for scholarships and awards but still needs to apply treaty benefits to his or her wages. This year, TaxSlayer is just not up to the task.

I feel bad for Whitley, a member of TaxSlayer’s customer support squad, who is left with the task of informing me that they are aware of the “issue” that prevents their software from properly applying and reporting a tax treaty benefit on a nonresident alien return.  She proceeded to tell me that they could only handle “simple” state returns in conjunction with an NRA return.  This means that I can’t make any adjustments to the state return in order to properly apportion income. They are “working diligently to iron out the wrinkles.”  Not being able to prepare a pretty basic nonresident alien return is a little more than just a wrinkle. Continue reading “TaxSlayer: Technically Acceptable for VITA Returns?”

As If It Were A “Tax”

Bobby L. Dexter
Professor, Chapman University, Dale E. Fowler School of Law

A complete and comprehensive discussion of the future of tax administration and enforcement requires, as an initial matter, some level of consensus with respect to the meaning of “tax.” For the most part, commentators referring to the word “tax” are comfortably on the same page, but as NFIB v. Sebelius, 132 S. Ct. 2566 (2012), recently taught us, the question of what does or does not constitute a tax can be contentious enough to make it to the nation’s highest court.  In Sebelius, the U.S. Supreme Court ruled that the penalty imposed on those failing to comply with the individual health care mandate of the Patient Protection and Affordable Care Act (“ObamaCare”) constituted a “tax” within the meaning of Article I, § 8 of the Constitution.  The Court thus confirmed that the notion of a “tax” is far more chameleon than one might think at first glance.  Then again, even if the Court had held otherwise, taxpayers might still have found themselves vulnerable.

Several years ago, section 6305 of the Internal Revenue Code of 1986 (as amended) (hereinafter, the “Code”) was used to allow aggressive pursuit of specific past due child support obligations.  Legislative fiat did the trick. Under that provision, the IRS could collect amounts certified by the Secretary of Health and Human Services “in the same manner, with the same powers, and . . . subject to the same limitations as if such amount were a tax . . . the collection of which would be jeopardized by delay . . .” (emphasis added). Thus, § 6305 not only morphed what many would consider non-tax items into tax status but also allowed the IRS to apply jeopardy assessment and collection measures.  Because pursuit of the revenue using § 6305 was deemed cumbersome even with enhanced collection powers, the new weapon of choice became § 6402.  That provision authorizes the seizure of federal income tax refunds with respect to a host of items including (1) past-due child support obligations; (2) past-due, legally enforceable debt owed to a federal agency (e.g., federally-guaranteed student loans); and (3) past-due, legally-enforceable state income tax obligations.  These provisions ultimately have the potential to substantially complicate “plain vanilla” tax administration and enforcement given that the federal government can serve, in essence, as debt collector for a host of obligations. Even if past due state income tax obligations and past-due child support obligations remain static, one cannot ignore the specter of ever-burgeoning, past-due, federally-guaranteed student debt owed to a federal agency (i.e., the Department of Education). A substantial portion of student debt now rests in the hands of the federal government, the cost of college-level and graduate education is skyrocketing, and student grant funding is under attack.

Some might argue that refund seizure is an extraordinarily efficient collection method given that it is largely electronic and therefore unlikely to result in enhanced administrative burden.  After all, unlike most unsecured creditors, the IRS sitting on a taxpayer refund need not seek out and secure a judgment, petition for a writ of execution, and attempt levy on widely-scattered, fortuitously unencumbered, and rapidly-evaporating assets. But at the end of the day, the measure may backfire. Badly. Although certain innocent spouses impacted by refund seizure under a joint return may enhance administrative burdens by pursuing partial refunds, the more ominous concern regarding administration and enforcement relates to what taxpayers may do in response to an initial seizure. The IRS’s creative display of power is just the first step in a sequential game.  Given their inevitable turn, taxpayers may alter withholdings to ensure that they do not end up in a refund posture or (assuming an initial seizure eliminated the obligation) embrace cheating as a way of “getting back” what was seized previously. Thus, the IRS’s willingness to seize a refund under one set of circumstances may ultimately introduce compliance and enforcement hurdles that were not initially present and may persist for years in the future. The refund intercept program also has potential privacy violation ramifications. A given taxpayer may suffer, for example, the revelation not only that they have a child outside their existing relationship but that they have failed to support the child.  Further, equity concerns present because a refund intercept program may affect only those subject to withholding while sparing those who submit quarterly estimated tax payments, notwithstanding the fact that both taxpayer classes are similarly-situated from an obligation default perspective.

Perhaps tax administrators should stay their hand and let those seeking payment from those with “non-tax” delinquencies pursue other channels. After all, the government may have the power to serve as debt collector, but it need not intervene in every instance, especially when administration and enforcement revenues have long been scarce. Indeed, intervention at the behest of a federal agency (or one of the several states) may ultimately make it more difficult for the IRS to accomplish its central and core mission of collecting revenue due the United States under its tax laws.

For further analysis of these issues, including those rooted in constitutional law, see Bobby L. Dexter, Transfiguration of the Deadbeat Dad and the Greedy Octogenarian:  An Intratextualist Critique of Tax Refund Seizures, 54 U. Kan. L. Rev. 643 (2006).

Is the Emperor Naked? Non-Enforcement of Tax-Exempt Organization Laws

Lloyd Hitoshi Mayer
Professor of Law, Notre Dame Law School

The Donald J. Trump Foundation admits to illegal self-dealing (The Washington Post). The Bill, Hillary & Chelsea Clinton Foundation files amended annual returns to correct numerous reporting errors (Amended Returns Fact Sheet). A white nationalist group avoids filing annual returns for several years, apparently in reliance on a bureaucratic misclassification (The Washington Post). On “Pulpit Freedom Sunday,” thousands of churches violate the prohibition on IRC section 501(c)(3) organizations supporting or opposing candidates (CNN). These and numerous other recent examples of behavior by tax-exempt organizations that clearly violates the applicable tax laws lead to one obvious question: where was the IRS? The growing perception – and sometimes although not always the reality – is that when it comes to the administration and enforcement of those laws there is no one home.

This trend should be of concern not only for tax scholars and policy makers but also for tax-exempt organizations themselves, if for no other reason than increasing instances of individuals and organizations taking advantage of this perceived lack of oversight almost certainly will lead to questions about the wisdom of providing tax and other benefits to such organizations in the first place. While charitable organizations are the most vulnerable in this respect because they enjoy the greatest such benefits and so face the highest public expectations regarding their behavior, commentators have begun to question even the more modest benefits enjoyed by other types of tax-exempt organizations (see, e.g., Philip T. Hackney, What We Talk About When We Talk About Tax Exemption, 33 Virginia Tax Review 115 (2013); David S. Miller, Reforming the Taxation of Exempt Organizations and Their Patrons, 67 The Tax Lawyer 451 (2014)). To understand this trend and therefore how to address it requires understanding the confluence of factors that have lend to its emergence. Continue reading “Is the Emperor Naked? Non-Enforcement of Tax-Exempt Organization Laws”

Rules and Standards in International Tax Enforcement

Steven Dean
Professor of Law, Brooklyn Law School

The international tax regime has struggled to make the leap to the era of big data.  The internet and other potent digital tools make it easy to accumulate and trade vast hoards of information.  Learning how to harness that data to improve fairness and efficiency by making it just as hard to evade taxes abroad as it is at home has proven more difficult.  Simply put, despite years of sustained effort, the algorithm that can do for international tax enforcement what Über has done for finding a ride remains out of reach.

In pursuit of that algorithm, the international tax regime has abandoned flexible standards in favor of precise rules.  Unfortunately, a rule capable of effortlessly bringing tax cheats to justice has so far proven elusive.  In Neither Rules Nor Standards, 87 Notre Dame L. Rev. 537 (2013), I described the appeal and the limits of the the hunt for algorithms (rules) to replace the standards that have long formed the core of the international tax regime.

Which is better for the international tax regime?  Rules seem to be the obvious answer.  And indeed, since the global financial crisis, nations have embraced rules calling for the supply of information according to precise specifications.  The U.S. FATCA regime calls for foreign banks to supply information about U.S. taxpayers to the I.R.S.  while the OECD’s Common Reporting Standard imposes comprehensive income reporting obligations on a broad network of states.  Each promises to provide tax authorities with extraterritorial tax information they need to crack down on tax cheats. Continue reading “Rules and Standards in International Tax Enforcement”

IRS Attorneys as Public Servants and Enforcers

Clint J. Locke
Instructor, The University of Alabama, Culverhouse School of Commerce

The mission of the IRS Office of Chief Counsel is to serve America’s taxpayers by impartially and fairly administering the tax laws while simultaneously providing high quality legal representation to the commissioner of the IRS.  At first glance this mission seems appropriately balanced between public service and legal enforcement.  However, further deliberation creates uncertainty as to how such a mission can be accomplished. ABA Model Rule 1.7 prevents attorneys from representing two clients in the same litigation proceeding when the interests of such clients are directly adverse to each other. Can IRS attorneys ethically serve the public and serve the IRS?

When a taxpayer files a Tax Court petition in response to a notice of deficiency, an adversarial relationship arises between the IRS attorney and the taxpayer.  This adversarial relationship exists within the judicial system and is contained within one specific Tax Court proceeding.  As a result, Model Rule 1.7 prevents an IRS attorney from representing the IRS and serving a taxpayer, regardless of informed consent.

It could be argued that representation of the IRS as a client and service to a taxpayer are two separate and distinct relationships, such that dual representation is not implicated.  This argument carries particular weight when a taxpayer is represented by an attorney.  However, a majority of Tax Court cases are filed pro se, putting the IRS attorney in a conflicting role.  The IRS attorney is now tasked with representing the IRS position, while at the same time informing the taxpayer of legal and factual issues.

There can be no question that the IRS attorney will be aware of factual or legal weaknesses in a taxpayer’s position.  The questions that do exist are: (1) which weaknesses will the IRS attorney reveal to the taxpayer, and (2) which legal authorities will the IRS attorney share with the taxpayer?  Representation of the IRS position directly conflicts with service to the taxpayer. Sharing a factual weakness with the taxpayer will be at the expense of the IRS position.  Informing the taxpayer of a specific legal authority will bolster the taxpayer’s argument or assist the taxpayer in meeting the factual requirements of the law.  Consequently, in the pro se context, public service crosses over into a quasi-client representation relationship.  This relationship is ethically impermissible pursuant to Model Rule 1.7.

Clearly there are circumstances, particularly with respect to IRS attorneys serving in the national office, where an IRS attorney can effectively and ethically enforce the law and serve the public.  However, as administration and enforcement of the law moves into the field offices, it becomes much more difficult for these two purposes to coexist.

Applying Offer-in-Compromise Principles to Student Loan Repayment

W. Edward “Ted” Afield
Associate Clinical Professor and Director, Philip C. Cook Low-Income Taxpayer Clinic, Georgia State University College of Law

Thanks to Leandra for organizing this group of posts from the excellent discussion our AALS Discussion Group had about the future of tax administration and enforcement.  During our discussion, I discussed how areas of tax administration and procedure are starting to become intertwined with other areas of law.  Currently, in an article that I am finalizing, I am exploring this theme in the context of the various student loan repayment programs, such as Income Based Repayment and Pay As You Earn, and examining how these programs would benefit from being modeled after tax liability relief programs that emphasize providing relief based on a taxpayer’s ability to pay.

Although the student repayment programs were not instituted through the Tax Code, they have nevertheless implicated the Code by tying repayment to adjusted gross income and creating a potential tax liability through debt forgiveness.  John Brooks has persuasively argued here and here that this model of student loan repayment is best analyzed as a system of taxation, or “quasi-public spending” rather than pure loan repayment.  As Brooks explains, under these repayment programs, government funds are used to finance student education and are repaid with a percentage of students’ incomes, making these programs appear very similar to a tax imposed to pay for a government benefit.  Brooks acknowledges that the analogy is not a perfect one, given that progressivity disappears at higher income levels, the “tax” is not due for life (rather, it is only due until the loan is repaid), there is currently a significant balloon payment for forgiven loans that produce taxable cancellation of debt income, the programs are administered by the Department of Education rather than by the Internal Revenue Service, and the benefit is predominantly funded by taxpayers who took out student loans (although taxpayers as a whole still fund a portion of the debt forgiveness).  Despite these differences between the loan repayment programs and the income tax, the fact that repayment is tied to income rather than the amount of the debt or the interest rate on the debt prevent student loan repayment programs from functioning as pure loans.

Tying these programs to taxpayer income produces distortions and unanticipated inequitable outcomes such as: Continue reading “Applying Offer-in-Compromise Principles to Student Loan Repayment”

Mind the Gap: Effect of IRS Budget Cuts on the Tax Gap and Potential Solutions

Roberta Mann
Mr. and Mrs. L. L. Stewart Professor of Business Law, University of Oregon School of Law

The Internal Revenue Service faces many challenges: scandals, threats to impeach the Commissioner, increasing burdens from expanding responsibilities, and, of course, the tax gap. In 2015, Jon Forman and I published an article entitled “Making the IRS Work,” which discussed ways of making the IRS more efficient given likely continued budget cuts under a Republican majority Congress. We concluded that while the IRS could become more efficient, the best way to enhance compliance and protect taxpayers would be to increase the IRS budget.

Since then, the prospect of increasing the IRS budget has not improved. Commissioner Koskinen reported that the IRS budget is down by $900 million since 2010. While the Obama Administration requested $12.280 billion to be appropriated for the IRS in FY2017, representing $1.045 billion more than the amount enacted for FY2016, the House passed a bill providing $10.999 billion in appropriations for the IRS in FY2017, representing $236 million below the amount enacted for FY2016. The Senate bill maintained FY2016 funding in its appropriations for the IRS.

An underlying assumption of our analysis is that the IRS should continue to function as an effective revenue collector. With lower budgets, the IRS must become more efficient to continue to effectively collect revenue. Uncollected revenue leads to the tax gap, which in general terms is the difference between the revenue owed and the revenue collected. A large tax gap not only constrains revenue, but also can lead to reduced voluntary compliance. IRS budget cuts over the past several years have not yet significantly affected the tax gap, which the IRS updated in April 2016. Continue reading “Mind the Gap: Effect of IRS Budget Cuts on the Tax Gap and Potential Solutions”

The Stages of Administrative Law Exceptionalism

Christoper J. Walker
Associate Professor, The Ohio State University Moritz College of Law

At the American Bar Association’s annual Administrative Law Conference in December, I had the privilege of moderating a panel entitled Your Agency Is Not That Special: The Decline of Administrative Law Exceptionalism. The panel consisted of leading experts on administrative law exceptionalism from three distinct regulatory fields: Jill Family for immigration, Kristin Hickman for tax, and Melissa Wasserman for patent law. The panel also included Mark Freeman, a senior attorney from the Justice Department’s Civil Appellate Staff, who has briefed and argued a number of important administrative law exceptionalism cases.

As we explained in the panel description, “[a]dministrative law exceptionalism—the misperception that a particular regulatory field is so different from the rest of the regulatory state that general administrative law principles do not apply—has plagued the modern regulatory state. We have seen it front in center in a variety of regulatory contexts from tax and financial regulation to patent law and immigration.”

On the tax front, Professor Hickman and I discussed at some length the Tax Court’s decision in Altera, which is presently on appeal in the Ninth Circuit, as well as the U.S. Chamber of Commerce’s challenge to the IRS’s inversion rule, which is pending in federal district court in Texas. Both of these cases have significant implications for the future of tax exceptionalism, though that is not the purpose of this blog post. Continue reading “The Stages of Administrative Law Exceptionalism”

The Tax Aspects of Pokémon Go

Adam Thimmesch
Assistant Professor, University of Nebraska-Lincoln College of Law

The new Pokémon Go app has already generated many discussions regarding the multiple ways that the game intersects with the law. I’ve previously opined on some of the broader issues, but, as a tax professor, my thoughts have naturally focused on that topic. Fortunately, the Surly Subgroup was nice enough to let me present those thoughts here in a guest post.

The tax issues that I’ve been thinking about stem largely from the fact that Pokémon Go is built on a freemium business model. That is, the app is free, but users can pay for certain “premium” features like additional Pokéballs, incense, and lure modules. (If these phrases mean nothing to you, here is a nice primer on the game.) Those purchases are all done through the purchase and use of an in-app currency called Pokécoins. The whole thing might sound silly, but the app is already generating over $1.5 million in daily revenue for its developer, Niantic, Inc. The company will also soon be selling “sponsored partnerships” that allow companies to be listed more prominently in the game. The potential revenue streams look plentiful at this point. So what are the tax issues?

Continue reading “The Tax Aspects of Pokémon Go”