Why Would Anyone Pay the Penalty for Being Uninsured?


A recent A.P. story about IRS enforcement of ObamaCare's individual health insurance mandate tax focuses on the personnel required but also mentions a point I made a few months before the Supreme Court upheld that provision (in a post headlined "If the Penalty for Uninsured Taxpayers Survives, Good Luck Collecting It"): If people decide not to buy the medical coverage the government thinks they should have, there is not much the government can do about it. Paying the penalty generally will be a lot cheaper than buying the insurance, and in any case the penalty is easily dodged:

The law…severely limits the ability of the IRS to collect the penalties. There are no civil or criminal penalties for refusing to pay it and the IRS cannot seize bank accounts or dock wages to collect it. No interest accumulates for unpaid penalties.

So how can the IRS enforce the mandate? Scary letters and threats to withhold tax refunds.

The law allows the IRS to withhold tax refunds to collect the penalty, and most filers get refunds. This year, 77 percent of the 135 million individual income tax returns processed by the IRS qualified for a refund. The average refund: $2,707.

For those who don't qualify for a refund, a stern letter from the IRS can be effective, even if it doesn't come with the threat of civil or criminal penalties, said Elizabeth Maresca, a former IRS trial attorney who supervises the Tax & Consumer Litigation Clinic at the Fordham University law school.

"Most people pay because they're scared, and I don't think that's going to change," Maresca said.

It should, once word gets out that the IRS is essentially powerless to collect this penalty/tax. People can even stop the IRS from taking the money out of their refunds by the simple expedient of changing their withholding so that they come out even (or owe a little) at the end of the year. (They probably should do that anyway, unless they like the idea of floating Uncle Sam an interest-free loan every year.) In practice, no refund = no tax. Yet analysts at the Congressional Budget Office predict that 4 million Americans will pay the tax in 2016, when it takes full effect. How stupid do they think we are?