$11 Billion In Missing ACA Subsidies From Mass Tax Noncompliance
Although the desire to provide lower-income people with larger subsidies is understandable, the ACA’s complicated subsidy structure has turned millions of people into inadvertent lawbreakers and has led to the misspending of a substantial amount of taxpayer dollars.
Complications arising from the Affordable Care Act (ACA) premium tax credits (PTCs) are causing millions of people to effectively break the law. People who benefit from advance premium tax credits (APTCs) must file tax returns and include a form to reconcile the advanced amount to the actual end-of-year entitled amount. The failure of so many people to fulfill this new legal requirement has led the government to spend more than it should have as APTCs tend to be higher than legally entitled amounts.
The big news is that tax filers, as of April 28, 2016, reported $15.8 billion in total APTC payments. According to data released by HHS, I estimate the amount of APTCs paid in 2015 equaled $26.7 billion—nearly $11 billion more than the amount reported by tax filers. It appears that about 3 million households that received an APTC in 2015 had not filed the required paperwork with the Internal Revenue Service (IRS) by the end of April 2016.
Subsidy Reconciliation Problems and Tax Noncompliance
The ACA authorized PTCs for people who purchase an insurance plan through an exchange and who meet certain characteristics. The PTC reduces out-of-pocket premiums, and the credit amount is dependent on several factors, one of which is household income. The size of the credit decreases as income increases, with $1,000 of additional income reducing the size of the credit by approximately $150.
In 2014, 97% of people who received a PTC had them advanced to the insurance company providing their coverage. The advanced amount is mainly based on the person’s estimated income and family size for that year. In order to reconcile the amount received by the insurer on their behalf with the amount they were legally entitled to receive, people must file Form 8962 when they file their regular Form 1040 tax return.
Only 8% of people with an APTC received the correct amount in 2014. Slightly more than half of people underestimated their income and had to pay money back to the IRS because their APTC was too high. The average amount these people had to pay back was $860. The remaining 41% who claimed an APTC overestimated their income and received an average additional refund of $640.
As of October 31, 2015, more than 1.4 million households had not correctly reconciled their 2014 APTC. About two-thirds submitted a return but did not include Form 8962. The remaining one-third did not file any return.
In total, $11.3 billion of the $15.5 billion total APTC amount in 2014 was successfully reconciled as of the end of October 2015. The IRS has not updated Congress on how much of the $4.2 billion remainder has since been reconciled. Preliminary 2015 tax year data from the Office of the Taxpayer Advocate indicates that ACA-caused tax noncompliance grew substantially from 2014 to 2015.
As of April 28, 2016, 4.5 million tax filers who submitted a 2015 tax return received an ATPC in 2015. The Department of Health and Human Services reported that nearly 8.7 million people were receiving an APTC at the end of the first quarter of 2015. This translates into about 7.2 million households receiving an APTC at the time. Since additional people signed up during the year through special enrollment periods, it is likely that the total number of households receiving an APTC at some point during 2015 exceeded 7.5 million.
This means about 3 million households failed to reconcile their 2015 APTC as of April 28, 2016. Because of the complexity of the ACA, many people were probably unaware they have to file a Form 8962. While some undoubtedly requested an extension and filed late, the discrepancy is very large. As noted earlier, nearly a third of 2014 households that received an APTC in 2014 had not properly reconciled the APTC by the end of October 2015.
Similar to 2014, people tended to receive too much ATPC in 2015. A simple calculation from the 2015 data shows that the average APTC was about $525 greater than the amount to which people were entitled.
It is worth noting that in July 2015, the IRS Commissioner updated Congress on the APTC reconciliation process for the 2014 tax filing season. Although we are nearing the end of September 2016, the IRS has failed to provide Congress with an update on the reconciliation process for the 2015 tax filing season.
The bureaucracy also appears to be failing at its legal requirement to cut off individuals’ 2016 APTC if they did not file a 2014 return. The Government Accountability Office found that four-out-of-four fictitious applicants who failed to file a tax return in 2014 were approved for an APTC again in 2016.
The phase-out of the ACA tax credits has widely been criticized for discouraging work and lowering economic output. In addition to those serious problems, administering the APTC has produced a major tax compliance problem as billions of 2014 and 2015 APTC payments are unaccounted for. Although the desire to provide lower-income people with larger subsidies is understandable, the ACA’s complicated subsidy structure has turned millions of people into inadvertent lawbreakers and has led to the misspending of a substantial amount of taxpayer dollars.