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80–693 2013

INTERNAL REVENUE SERVICE’S IMPLEMENTATION 

AND ADMINISTRATION OF THE DEMOCRATS’ 

HEALTH CARE LAW 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

SEPTEMBER 11, 2012

Serial No. 112–OS16 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

TOM REED, New York 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JENNIFER M. SAFAVIAN, Staff Director and General Counsel 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON OVERSIGHT 

CHARLES W. BOUSTANY, JR., Louisiana, Chairman 

DIANE BLACK, Tennessee 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

KENNY MARCHANT, Texas 

TOM REED, New York 

ERIK PAULSEN, Minnesota 

JOHN LEWIS, Georgia 

XAVIER BECERRA, California 

RON KIND, Wisconsin 

JIM MCDERMOTT, Washington 


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C O N T E N T S 

Page 

Advisory of September 11, 2012 announcing the hearing .................................... 2 

WITNESSES 

PANEL 1: 

Steven T. Miller, Deputy Commissioner for Services and Enforcement, Internal Revenue Service, Testimony ......................................................................... 6 

PANEL 2: 

Mr. Fred Goldberg, Jr., Partner; Skadden, Arps, Slate, Meagher & Flom 

LLP, Testimony .................................................................................................... 26 

Ms. Kathy Pickering, Executive Director, The Tax Institute at H&R Block; 

Vice President, Government Relations, Testimony ........................................... 35 

Mr. Scott A. Hodge, President; The Tax Foundation, Testimony ........................ 44 

Mr. Seth T. Perreta, Partner, Crowell and Moring LLP, Testimony .................. 52 

SUBMISSIONS FOR THE RECORD 

Timothy Stoltzfus Jost ............................................................................................ 77 

William G. Schiffbauer ............................................................................................ 86 


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INTERNAL REVENUE SERVICE’S IMPLEMENTATION AND ADMINISTRATION OF THE 

DEMOCRATS’ HEALTH CARE LAW 

TUESDAY, SEPTEMBER 11, 2012 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON OVERSIGHT, Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:46 a.m. in room 

1100, Longworth House Office Building, the Honorable Charles 

Boustany (Chairman of the Subcommittee) presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

Boustany Announces Hearing on the Internal Revenue Service’s Implementation and Administration of the Democrats’ Health Care Law 

Tuesday, September 04, 2012 

*UPDATE: NEW TIME* 

ALL OTHER DETAILS OF THE HEARING REMAIN THE SAME. 

Congressman Charles W. Boustany, Jr., MD, (R–LA), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, today announced the 

Subcommittee will hold a hearing on the Internal Revenue Service’s (‘‘IRS’’) implementation and administration of the Patient Protection and Affordable Care Act and 

Health Care and Education Reconciliation Act of 2010 (‘‘Democrats’ health care 

law’’). The hearing will take place on Tuesday, September 11, 2012, in room 1100 

of the Longworth House Office Building, beginning at 9:45 A.M. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Subcommittee and for inclusion in the printed record of the hearing. 

A list of invited witnesses will follow. 

BACKGROUND: 

Enacted in large part on March 23, 2010, the Democrats’ health care law contains 

47 tax or tax-related provisions, some of which are already in effect and others that 

will become effective over the next 18 months. These provisions include, the individual mandate and employer mandate taxes, restrictions on the use of Flexible 

Spending Arrangements and Health Savings Accounts, a new 3.8 percent tax on investment income, newly mandated information reporting on health insurance coverage, new taxes on medical devices, a new Medicare payroll tax, the health insurance premium subsidy, and new requirements for tax-exempt hospitals and group 

health insurance plans. 

The IRS is charged with implementing and administering these new provisions 

on top of its existing duties under the Internal Revenue Code, which include collecting $2.4 trillion in taxes, processing 145 million individual tax returns, issuing 

$345 billion in tax refunds, and administering numerous non-revenue provisions 

such as the Earned Income Tax Credit and various green energy subsidies. 

Along with its review of the IRS’s new duties, the Subcommittee will consider: (1) 

how the IRS’s new duties under the health care law will affect both taxpayers and 

the IRS’s core revenue-collection function; (2) the IRS’s progress in implementing 

various provisions of the health care law, both those that are already in effect and 

those that are not yet in place; and (3) how the agency will coordinate with other 

Federal departments, state governments, and stakeholders to implement the new 

tax provisions. 

In announcing the hearing, Chairman Boustany said, ‘‘In recent years, the Subcommittee has held hearings on the IRS’s budget, its administration of our 

complex and convoluted Tax Code, and an estimated $100 billion in taxpayer dollars that have been lost to fraud, waste, and abuse over the past 

decade. Under President Obama’s health care law, the IRS is now charged 

with administering much of the health care law. It is imperative that we 

take a close look at these new duties and consider the impact they will 

have on the agency and the taxpayers it serves.’’ 


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FOCUS OF THE HEARING: 

The hearing will focus on the IRS’s implementation of various tax provisions enacted in the Democrats’ health care law and consider how the agency’s implementation of the law will affect taxpayers and its core revenue-collection mission. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you 

would like to submit, and click on the link entitled, ‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance 

with the formatting requirements listed below, by the close of business on Tuesday, September 25, 2012. Finally, please note that due to the change in House 

mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House 

Office Buildings. For questions, or if you encounter technical problems, please call 

(202) 225–1721 or (202) 225–3625. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://www.waysandmeans.house.gov

f 

/. 

Chairman BOUSTANY. This hearing will now come to order. 

Good morning and welcome to today’s hearing on the Internal Revenue’s implementation and administration of the President’s health 

care law. 

Before we begin this morning, it is appropriate to recall that 11 

years ago, almost to the hour, our Nation was savagely attacked. 

After these 11 years, each of us can certainly recall exactly what 

we were doing at that time. 


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The horror of the day should give us the resolve to continue 

doing our business and demonstrate that we will not be intimidated or deterred. 

More than a decade has passed but the attacks of the day still 

outrage, the tragedies still overwhelm, and the acts of heroism still 

inspire us. 

We still mourn those lost on that day and all those who have 

given their lives since in the defense of liberty. We are thankful for 

those who continue to stand and volunteer to serve our country 

both at home and abroad. 

We will take a recess from this Subcommittee’s proceedings at 

10:45, so that those who wish to join the 9/11 remembrance in the 

Capitol can do so, and then we will promptly reconvene at 11:30 

to resume the hearing. 

We are going to watch the clock pretty closely and we will stop 

at around 10:45. 

The Internal Revenue Service has enormous responsibility. It is 

tasked with administering our very convoluted tax system and a 

Tax Code that has changed nearly 5,000 times in the past 10 years 

alone. 

The agency is charged with collecting roughly $2.5 trillion, distributing hundreds of billions of dollars in tax credits, and enforcing 4,000 pages of tax laws, and 80,000 pages of tax regulations. 

The agency’s core revenue collection function has increasingly 

been crowded by its responsibility to administer many social programs. 

Through the years, Congress has sought to advance a multitude 

of non-revenue objectives through the Tax Code, energy policy, 

housing policy, and of course, health care policy. 

Making the IRS both revenue collector and administrator of 

these activities has diverted the IRS’ resources from its central 

mission and can diminish taxpayer service. 

In 2010, Congress passed President Obama’s health care law, expanding nearly 1,000 pages and passed ‘‘so you can find out what 

is in it,’’ in the famous words of then-Speaker Nancy Pelosi. 

The health care law contained 47 tax provisions and charged the 

IRS with vast new responsibilities. 

These included the implementation and administration of the 

largest entitlement created in more than a generation, new penalty 

taxes on individuals and employers who fail to provide or buy government approved health insurance, the need to quickly create vast 

new information technology systems, and the list goes on and on. 

The President’s health care law has put the Federal Government 

in charge of approving health insurance plans, subsidizing them, 

punishing those who do not buy government approved plans, and 

many other aspects of our health care system. 

The Internal Revenue Service has been saddled with the responsibility of carrying out many of these new Federal activities. 

More than creating new burdens on the IRS, the President’s 

health care law has led to new tax rules and regulations that will 

pose significant challenges to both individuals and job creators. 

The Administration’s own documents state that the compliance 

burden of the new rules it has thus far written pursuant to the 

President’s health care law will add nearly 80 million man hours 


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each to individuals and job creators. This is just the 17 regulations 

that have been issued so far. There are more to come. 

Eighty million hours that will not be spent creating new wealth, 

providing health care, or doing anything productive. 

Eighty million hours simply complying with new rules from 

Washington. 

This is the burden from just the IRS’ new rules, the 17 new rules 

that have been promulgated. When you add the new regulations 

from HHS, the Department of Labor, and other agencies, the burden on our sluggish economy goes still higher. 

As a former surgeon and owner of a small medical practice in 

Louisiana, I certainly know how taxes, rules and regulations from 

Washington can impede not only a small business but also patient 

care. 

I am especially interested in hearing from the IRS and our witnesses today about how the new law will operate in the real world, 

in real time. 

The object of this hearing is to assess the IRS’ efforts to administer the law, including its efforts on the Service’s core mission, and 

how decisions made now to implement it will affect both the agency 

and taxpayers as the provisions continue to come into effect. 

Ladies and gentlemen, this is also not a hearing to beat up the 

IRS, an agency run by good men and good women. I want to emphasize that. Dedicated public servants who have an incredibly difficult job. 

The agency did not write the health care law. The previous Congress did. It passed the law. Now we are finding out what is in it 

and what it means for the country and for the Internal Revenue 

Service and for taxpayers. 

I look forward to the testimony and questioning of our witnesses. 

Now, I am pleased to yield to the distinguished Ranking Member 

from Georgia, Mr. Lewis. 

Mr. LEWIS. Thank you, Mr. Chairman. First of all, I want to 

thank you for pausing to observe what happened to our country 11 

years ago today. It is my hope and prayer that Americans all over 

will pause and observe what happened. 

Mr. Chairman, I want to thank you for holding this hearing on 

the Affordable Care Act. We are always pleased to discuss our 

landmark health reform law which will expand health coverage to 

over 30 million Americans. 

Because of the Affordable Care Act, children today cannot be denied insurance benefits due to preexisting conditions, and young 

adults can stay on their parents’ insurance until age 26. 

Seniors are already saving hundreds of dollars on their prescription drugs and receiving free preventive services. 

This morning, the Department of Health and Human Services 

announced that the Affordable Care Act has saved people with private insurance over $2 billion. 

We must ensure that the Internal Revenue Service continues to 

move with all deliberate speed to deliver hundreds of billions of 

dollars of Federal tax credits to American families and small businesses, which will make health insurance affordable. 

I am confident that the tax provisions of the Affordable Care Act 

will be carried out on schedule. 


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Today, I look forward to learning where we are in the process, 

the problems we have seen, and the issues that remain. 

I want to thank all of the witnesses for their recommendations 

to address these issues. I also look forward to hearing from the 

agency about the resources it needs to fulfill its duties under the 

health reform law. 

I continue to have serious concerns about the effect of recent 

budget cuts on taxpayers, tax collection, and agency operations. 

This year, the agency’s budget was cut by over $300 million. This 

cut harmed taxpayers and tax administration. For fiscal year 2013, 

the IRS requested a budget increase of $360 million for administration of the health reform law. Almost 75 percent of this money will 

be spent on technology needed to deliver hundreds of billions of dollars in tax credits. 

I look forward to hearing more about the IRS budget request and 

how the amount requested will help the agency complete its work 

on the health care law while protecting Federal tax dollars. 

Thank you very much, Mr. Chairman. 

Chairman BOUSTANY. Thank you, Ranking Member Lewis. 

Next, it is my pleasure to welcome two panels of witnesses before 

us today. 

Today’s witnesses have extensive experience with the IRS and 

tax compliance, and I am delighted to have all with us. 

Our first panel will consist of Deputy Commissioner Steven T. 

Miller. I want to welcome him again before our Subcommittee. We 

appreciate you being willing to come before us today. 

Steven T. Miller, Deputy Commissioner for Services and Enforcement at the Internal Revenue Service. 

Deputy Commissioner Miller, the Committee has received your 

written testimony, and it will be made part of the formal hearing 

record. You will have 5 minutes for your oral remarks as is customary. You are recognized for 5 minutes, sir. 

STATEMENT OF STEVEN T. MILLER, DEPUTY COMMISSIONER 

FOR SERVICES AND ENFORCEMENT, INTERNAL REVENUE 

SERVICE 

Mr. MILLER. Thanks so much, Mr. Chairman. Chairman 

Boustany, Ranking Member Lewis, Members of the Subcommittee, 

thanks for the opportunity to update you on the IRS’ staged implementation of the tax law portion of the Affordable Care Act. 

As I begin, let me say that there is no doubt that implementation 

of the ACA has required and will continue to require a concentrated effort on our part. 

However, the IRS has a successful history of such efforts. In this 

case, the IRS is taking full advantage of the fact that the major exchange related provisions, with respect to those, we will have time 

to plan our implementation and communicate with taxpayers. 

The IRS began both short term implementation and long term 

planning immediately upon passage of ACA. Our efforts focused on 

two things. First, to quickly implement tax law changes that were 

retroactively or immediately effective. 

Examples in this first category include the small business health 

care tax credit, the expansion of the adoption credit, and specific 


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industry provisions such as those that focused on qualified therapeutic projects and the indoor tanning industry. 

In terms of those provisions that had future effective dates, we 

moved quickly to put a structure and process in place to plan and 

implement these provisions. 

Because many ACA tax provisions are substantial and require 

long term planning, the IRS established enterprise-wide governance and planning processes, both in its business operations and its 

information technology divisions. This is a significant undertaking 

and a lot of work still lies ahead. However, by involving top leadership and using established best practices, we have made important 

progress. 

We have prioritized our work based on the particular effective 

date of a provision and/or the need for the Government or taxpayers to build the systems necessary to support the new law. 

This approach is taken whether we are talking about our IT 

work or how we prioritize our guidance to the community. 

The IRS’ most substantial implementation efforts relate to our 

work with the exchanges and the premium tax credit. In this area, 

we are working on the secure delivery of information to HHS as 

well as other work that will ensure that advanced premium tax 

credits are available beginning in 2014. 

The Department of Health and Human Services is the lead agency defining the structure and operations of the exchanges with 

Treasury and the IRS defining some of the associated rules. 

As part of our efforts, we are working to provide clear and flexible guidance to the community, and we have done this after engaging in a robust dialogue with those impacted. 

For example, we have worked closely with large employers to get 

them key pieces of guidance and time to set up their systems and 

procedures, including a number of simplifying safe harbors to assist 

in measurement and compliance. 

In terms of guidance on ACA more generally, we have to date 

issued a variety of regulations, more than 40 notices, as well as a 

variety of revenue rulings, procedures, announcements, and frequently asked questions. 

While there is much yet to be done, we have already accomplished a great deal. 

In addition to building necessary systems and issuing guidance, 

we are working on how taxpayers will interact with the IRS as 

they file their returns. This involves both service and compliance. 

We do have some time as most of these interactions begin during 

the 2015 tax filing season. Still, we are already engaged in discussions with tax return preparers and software developers so the taxpayers have what they need at the time they file their 2014 tax return. 

Let me speak to one area in particular, as there have been numerous questions about how the IRS will verify individual coverage. 

The IRS process for verifying coverage will be very similar to the 

one we have used for years to verify wages and withholding. The 

IRS will match what is reported on the tax return with the information reported by insurers. 


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We will follow up with taxpayers who appear to have over paid, 

under paid, and/or were not eligible for an exemption. 

This will take the form of written correspondence. Revenue 

agents will not be doing this work. As required by the statute, we 

will not use levies, liens, or criminal prosecutions if taxpayers have 

unpaid amounts related to the individual coverage provision. 

Thank you for the opportunity to testify on our planning and implementation efforts related to ACA’s tax provisions. It is a large 

undertaking but over the last several years, there have been thousands of tax law changes, some larger than others, and the IRS has 

implemented them all. 

Our work to date on ACA is going well. We have the processes 

and structure in place to succeed. 

I would be happy to answer any questions. 

[The prepared statement of Mr. Miller follows:] 


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WRITTEN TESTIMONY 

OF 

STEVEN T. MILLER 

DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT 

INTERNAL REVENUE SERVICE 

BEFORE THE 

HOUSE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

HEARING ON 

IMPLEMENTATION OF TAX LAW CHANGES IN 

THE AFFORDABLE CARE ACT 

SEPTEMBER 1J, 2012 

lNTRODUCTlON 

Chairman Boustany, Ranking Member Lewis and members of the Subcommittee, thank 

you for the opportunity to update you on the IRS' staged implementation of the tax law 

changes contained in the Affordable Care Act (ACA). 

Whenever Congress passes changes to the tax law, the IRS must take the necessary steps 

to educate and communicate with taxpayers about the changes, update relevant forms and 

publications, change or re-program its information technology systems, and implement 

appropriate programs to sustain high levels of compliance with the new provisions. The 

ACA is no exception. 

Both short-term implementation and long-term planning began immediately upon 

passage of the legislation. Our efforts focused on: (1) ensuring tax law changes that were 

retroactively or immediately effective were implemented in an expedited manner; and (2) 

putting structures and processes in place to begin planning for provisions with future 

effective dates. 

EARLY IMPLEMENTATION EFFORTS 

The IRS moved quickly to implement a number of tax law provisions in the ACA that 

immediately went into effect upon enactment. Let me discuss a few provisions that the 

IRS implemented immediately upon enactment of the ACA in 2010. 

The IRS conducted an extensive outreach and implementation program for the Small 

Business Health Care Tax Credit. Shortly after the ACA was passed, the IRS determined 

the necessary steps to both implement the credit and track these efforts. The IRS 

conducted significant outreach, communication, and educational activities to inform 

small businesses and tax professionals about the credit. 

We created a special page on our web site, IRS.gov, just for the Small Business Health 

Care Tax Credit. From there, taxpayers could use a step-by-step guide to see if they 
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qualified for the credit and how to claim it. There are also links to a Question and Answer 

section, a special You Tube video, legal guidance, news releases, and information flyers. 

The ACA also expanded the existing adoption tax credit. The dollar value of the 

Adoption Credit was not only increased from $12,150 to $13,170 but was also made 

refundable. In 2010, we issued guidance on the expanded adoption credit and updated 

forms and instructions so that eligible taxpayers could claim the newly expanded 

adoption credit on their 2010 tax retu111S. 

Taxpayers and practitioners could also find on IRS.gov a step-by-step procedure for 

claiming the credit, including a link to "Instructions for Form 8839" which has a detailed 

list of the acceptable required documentation. The documentation required can vary 

depending on whether it is a domestic or foreign adoption. 

This online article also spells out what happens if a taxpayer's return claiming the credit 

is selected for review. For example, the taxpayer will receive a notice from the IRS 

explaining the steps he or she must take, such as providing certain documentation to 

resolve the issue. 

Finally, the IRS quickly communicated with taxpayers and issued guidance relating to the 

ACA provision requiring group health plans and health insurance issuers that provide 

dependent coverage of children to continue to make such coverage available for an adult 

child until age 26. The ACA amended the Internal Revenue Code to give certain 

favorable tax treatment to this coverage for adult children. The IRS guidance explained 

that the statutory provision provides that health coverage provided for an employee's 

children less than 27 years of age is generally tax-free to the employee, effective March 

30,2010. 

PREMIUM TAX CREDITS 

The IRS' most substantial implementation effort relates to the delivery of premium 

assistance tax credits that will help millions of American families afford health insurance 

starting in 2014. 

The Department of Health and Human Services (RRS) is the lead agency on defining the 

structure and operations ofthe Affordable Insurance Exchange or, "Exchanges," with 

Treasury/IRS defining the associated rules for how tax credits can help subsidize the 

coverage available through the Exchanges. 

Starting in 2014, individuals who do not have access to affordable employer-sponsored 

insurance or other minimum essential coverage may be eligible to receive advance 

premium tax credits for private insurance that they purchase through the Exchanges. HRS 

will publish guidance on how the Exchanges will administer the advance payments of the 

credits. It is important to note that the advance payments ofthe credit will be paid 

directly to the insurer, and cannot be accessed directly by the taxpayer. 

2 
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Taxpayers will reconcile these advance payments on their tax returns. If the actual credit 

is larger than the sum of advance payments, the taxpayer will be entitled to a refund. If 

the actual credit is smaller than the sum of the advance payments, the taxpayer will owe 

the difference, subject to caps for certain individuals included in the ACA, as amended. 

Separately, the ACA provides an important role for tax return information in helping to 

determine eligibility for both Medicaid and premium tax credits. IRS staff has been 

working closely with HHS and the states on developing secure and efficient systems. 

MINIMUM COVERAGE PROVISION 

The ACA also stipulates that starting in 2014 individuals who can afford health insurance 

coverage, and are not eligible for exemptions, must either purchase minimum essential 

coverage, or make a payment with their tax returns. 

The individual minimum coverage provision is projected to affect only a small 

percentage of the total population when it comes into effect in 2014. The Congressional 

Budget Office and Joint Committee on Taxation previously estimated that approximately 

four million people - approximately 1 percent of the projected population - will make a 

payment (or, in the case of dependents, have a payment made on their behalf) in 2016. 

Let me be clear that the payment only applies to taxpayers who can afford insurance but 

do not purchase it. There are also a number of individuals who will be exempt from the 

individual coverage provision, such as those with income below the tax filing threshold 

or those whose premiums are not affordable. 

Taxpayers will get a fOlm at the end of every year from their insurer to use when they 

prepare their tax returns. It is important to note that the information that insurers provide 

to the IRS will show the fact of insurance coverage, and will not include any personal 

health infonnation. 

In most cases, taxpayers will file their tax returns reporting their health insurance 

coverage, and/or making a payment, and there will be no need for further interactions 

with the IRS. The IRS process for verifying coverage will be very similar to the one that 

the IRS has used for years to verify wages and withholding. The follow-up will generally 

be performed by written correspondence, and will allow taxpayers time to gather the 

information needed to respond, or get help in understanding the details of the provision. 

In this regard, let me clear up one misconception. Generally, revenue agents - who are 

specially trained on more complicated aspects of the tax code - would not work on 

resolving these types of issues, just as they don't work on resolving mismatches between 

W-2s and income tax returns today. Typically, these issues are addressed and resolved 

through written correspondence. 

The law also clearly specifies that the I RS will not use levies or tile notices of federal tax 

lien if1axpayers have unpaid amounts related to the individual coverage provision. 

Moreover, taxpayers will not be criminally prosecuted for non-payment of this amount. 
12 

f 

Chairman BOUSTANY. Thank you, Mr. Miller. We have a lot of 

uncertainty out there today amongst the business community and 

families with regard to what is going to happen with taxes. Of 

course, we know about all the expiring tax provisions that are coming at the end of the year unless Congress duly acts. 


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I would like to point out that the House has acted in July to 

avert rates from going up. I hope that the other body across the 

Capitol will move forward and do so hastily to eliminate this uncertainty that is ongoing. 

With that having been said, clearly we know there is a lot of uncertainty related to ACA, the implementation, the tax implications. 

I know the IRS has begun issuing regulations in accordance with 

the President’s health law with many more coming. In fact, I have 

these two binders right here. These are the regulations, revenue 

proceedings, revenue rulings, and Treasury decisions to date, encompassing some 17 new regulations the IRS has published so far, 

that will require nearly 80 million hours of compliance work by 

taxpayers annually. Eighty million hours so far. 

This is according to the IRS and the Office of Management and 

Budget materials published in the Federal Register. 

This includes over 25 million hours for information reporting by 

tax exempt organizations, over 40 million hours for small businesses, and almost three million hours for the self employed. 

This additional 80 million hours is based only on what regulations have been published already, not on those coming. That is my 

understanding. 

Mr. Miller, can you give us an estimate of the regulatory burden 

expected once the President’s law is fully implemented? 

Mr. MILLER. First, I guess, Mr. Chairman, I do not know the 

80 million figure, so I am not prepared to speak to whether that 

is correct or not. I am assuming it is correct, but I do not have that 

figure. 

Chairman BOUSTANY. This is from IRS and OMB. 

Mr. MILLER. I do not have a sense at this point for a total number of hours. Until we do the regulations and complete that work, 

that really is not possible. 

Chairman BOUSTANY. I understand. Given what we have so 

far, is it possible to estimate the economic cost to our economy on 

this? Are you aware of any estimates of the economic burden this 

will impose on American taxpayers? 

Mr. MILLER. Sir, you are talking to the Administrator, Mr. 

Chairman. I would not be able to speak to the economics of the situation, only to our working through the provisions and getting the 

guidance out to folks that need to comply. 

Chairman BOUSTANY. This will certainly be a question we will 

need to further investigate with Treasury and others. 

The President’s law creates new insurance subsidies and employer mandate taxes, which are tied to the subsidies. Under the 

language of Section 1401 of that law, the subsidies are only available to individuals enrolled through an exchange established by the 

state. That is the statute. 

Yet, in August last year, the IRS proposed a rule that ran 

counter or seemingly ran counter to the plain language of the statute, providing for subsidies in states regardless of whether that 

state chose to create an exchange or not. 

This gives rise to employer mandate taxes that are not provided 

for by the statute and some have alleged it was done at the urging 

of political appointees at the Treasury Department and the White 

House. 


ccoleman on DSK8P6SHH1PROD with HEARING
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I know your position as Administrator is well taken, and I understand that. Can you publicly state whether the IRS had received 

any communication from political appointees at Treasury or anyone 

at the White House urging this reading of the statute? 

Mr. MILLER. Let me start with how our regulatory process 

works, which is a tripartite discussion between the Department of 

Treasury, Office of Tax Policy, our Office of Chief Counsel, our lawyers, and the Internal Revenue Service itself, Doug Shulman and 

myself. 

The jurisdictions, the Office of Tax Policy, really plays lead on 

policy matters. We take a look and see, as the IRS, is the proposed 

rule ‘‘administratable,’’ can we do it. We all have a part in talking 

to stakeholders about the rule. 

Our Chief Counsel’s Office really speaks to what are the permissible reading’s of a particular statutory provision. 

In this case, we probably did have discussions with the Administration, and that is not a surprise because where there is a multiagency regulation, generally that will happen. Who in particular 

was briefed, I do not know. 

What I can say and what I want you to take away from this, Mr. 

Chairman, is the decision as to whether our reading of Federal 

versus just state was correct was made by our Counsel’s Office at 

the IRS. We believe it is the correct legal interpretation. 

Chairman BOUSTANY. This was not solely an IRS determination but it was done with legal counsel at IRS in combination with 

those at Treasury and the White House? 

Mr. MILLER. You are putting the White House in there, and I 

do not know they were involved. The decision on whether the regulation contained a provision—to step around that a little bit, our 

position, and it is the IRS’ position, is that you cannot read that 

statutory provision alone. You need to look at not only the text but 

the context, the purpose, and the structure of the statute. 

Our reading that a Federal exchange can provide a subsidy is a 

preferred reading, and it is the finding of the Chief Counsel’s Office 

at the IRS. 

Chairman BOUSTANY. Okay. What we would like as a subcommittee are the dates and participants at all meetings, notes 

from those meetings. Certainly documents relating to that determination that the insurance premium subsidies apply to the Federal exchanges, Federally created exchanges. 

This is clearly something we dispute because the reading in the 

statute seems very clear. As you cite other aspects of the law, we 

would like to know what other aspects in the law were used in that 

determination by legal counsel and all outside input, including if 

indeed there was input from White House political advisors, but 

certainly I know Treasury was involved in this because it is a policy matter. 

Mr. MILLER. Right. 

Chairman BOUSTANY. If you could provide that to us as 

promptly as possible, we would certainly appreciate it. 

Mr. MILLER. We will be glad to respond. 

Chairman BOUSTANY. Thank you. With that, I will be happy to 

yield to my friend, the Ranking Member, for questions. 


ccoleman on DSK8P6SHH1PROD with HEARING
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Mr. LEWIS. Thank you very much, Mr. Chairman. Mr. Miller, at 

this moment today, do you expect IRS to be ready for the health 

care law by 2014? 

Mr. MILLER. Absolutely, Mr. Lewis. 

Mr. LEWIS. You do not have any reservation, you are ready? 

Mr. MILLER. We are ready. We will be ready. Based on what I 

know, based on our level of effort to date, based on the planning 

and structures we have put in place, we will be ready on the exchange related provisions and other provisions of the ACA. 

Mr. LEWIS. Will the administration of the health care law harm 

the IRS’ core revenue collection mission? 

Mr. MILLER. I do not believe so. I will step back from that question, Mr. Lewis. I do not recognize core versus non-core in terms 

of the IRS’ work. This is what we do. Congress passes a statute, 

whether it is a charitable deduction or whether it is a home mortgage deduction, some of those things have varied purposes, but 

they are in the Tax Code. 

We consider the ACA to be our core work. It is part of our core 

work. 

Mr. LEWIS. Mr. Commissioner, has the IRS been listening to 

and working with outside stakeholders to provide guidance that is 

responsive to their needs? 

Mr. MILLER. We have. In fact, I would note for the Chairman, 

in that big book, a whole bunch of that book are requests for comments and suggested safe harbors, and all the types of things we 

ought to be doing to engage the business community and others before we put out final rules. 

Mr. LEWIS. As part of carrying out the health reform law, does 

the IRS plan to conduct education, maybe workshops, activities, 

outreach to taxpayers, employers and tax professionals? What has 

the IRS done so far? 

Mr. MILLER. Again, here we are guided in our approach by the 

effective date of the provision. For example, the early provisions, 

we did something in excess of 1,500 meetings with small business 

over the tax credit for small business. We have done a couple of 

hundred meetings with folks in the tanning industry. 

We have tried to engage those folks. As we move into 2013, we 

will obviously start working on what is going to happen with the 

health care credits later in that year. 

This past year, we engaged more than 10,000 return preparers 

at our various tax forums around the country to try to educate 

them on what is here today and what is coming in the next year. 

We have a very active outreach program. 

Mr. LEWIS. Mr. Miller, for the year 2013, the IRS requested 

about $270 million for technology and operational support to deliver new tax credits. 

I want you to explain to Members of the Committee why additional money is needed for the IRS’ computer system and how the 

computer system will be used to deliver the tax credits. 

Mr. MILLER. IT builds are considerable. The first that is necessary is we are obligated under the statute to provide some taxpayer information, to provide income and family size, so that the 

exchanges can do their work as people come in to sign up and get 

the right amount of advance premium. 


ccoleman on DSK8P6SHH1PROD with HEARING
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That work continues. We are working incredibly well with HHS 

and CMS to make sure that happens. That will be in place for the 

open season, which begins in late 2013. That is the first build. 

We also have a build where we will have to receive the information returns from various parties to ensure that the correct 

amounts are being paid out and verify that. That work becomes 

very important as we have the filing season for 2014. 

We have a whole array of work with respect to the exchange related provisions, and then there are some other provisions as well 

that require IT work. 

We do have significant building to do in the IT arena. 

Mr. LEWIS. Thank you very much, Mr. Miller. I yield back, Mr. 

Chairman. 

Chairman BOUSTANY. Ms. Jenkins, you are recognized for five 

minutes. 

Ms. JENKINS. Thank you, Mr. Chairman. Thank you for holding 

this hearing, and thank you, Commissioner Miller, for being here. 

Commissioner Shulman has said the President’s health care law, 

and I quote ‘‘Fragmentation of operational workload increases the 

difficulty of execution and will require an extraordinary amount of 

coordination with other players in the health care system.’’ 

For example, HHS will have to reach out to IRS to verify income 

and family size. Homeland Security might have to verify immigration status. The Social Security Administration might have to 

verify citizenship. 

All of this is occurring while a trillion in subsidies will be flying 

out the door. 

Are you aware of any previous law that has ever required the 

IRS to interact so extensively with other governmental agencies, 

and what sort of stress will this extension interaction place on the 

IRS’ core function? 

Mr. MILLER. We share taxpayer information under very stringent restrictions with an awful lot of folks, with the state tax authorities, the state Medicaid authorities, with Social Security. We 

have a long history of doing it. It does not stress us. 

It does require us to work very hard to ensure that the safeguards are in place, that that taxpayer information is protected. 

Ms. JENKINS. No extra heavy lift on your part to coordinate? 

Mr. MILLER. As I mentioned, the IT work itself is a decent lift 

for us. We are working on that and we will succeed on it, but it 

is a decent lift. 

Ms. JENKINS. Okay. The insurance premium subsidy will be 

based on a new definition of IRS household income, which is affected by the make up of families’ income, their personal finances 

and other personal matters. 

Under the President’s health care law, individuals are responsible for informing governmental officials at the insurance exchange if they have changes to their household income during the 

year. This would be the adjusted size of their subsidy; is that correct? 

Mr. MILLER. I am less familiar with that piece of that because 

that is not really the IRS piece. 


ccoleman on DSK8P6SHH1PROD with HEARING
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It is true that when you come in the door to sign up for coverage 

and for an advance premium, there will be a discussion of what is 

your tax situation, what is the appropriate amount of the premium. 

As things change during the year, I believe there is an obligation 

to come back and talk to the exchange about whether that impacts 

the amount of the premium. 

Ms. JENKINS. If I lose a current job or get demoted, lose pay 

or get a raise, any change in all of that, as you understand, I would 

need to inform a governmental official at the exchange? 

Mr. MILLER. I do not know. I am quite sure it is not any 

change, Congresswoman. I cannot speak to that because that is an 

HHS sort of job to define that. 

Ms. JENKINS. Is there somebody that could get us that information? 

Mr. MILLER. I would think HHS would be the place to go for 

that. 

Ms. JENKINS. Okay. Thank you. I yield back. 

Chairman BOUSTANY. Mr. Kind. 

Mr. KIND. Thank you, Mr. Chairman. Thank you, Mr. Miller, for 

your testimony here today and the service that the IRS provides 

our Nation overall. 

I guess, Mr. Chairman, the big news this week for the Affordable 

Care Act that was revealed was Mitt Romney’s embrace of some of 

the provisions that are part of the Affordable Care Act. 

To tell you the truth, it is not too surprising. For anyone who has 

read the actual legislation and understands what is in it and the 

provisions contained there, there has been wide embrace on both 

sides of the aisle on a variety of provisions. 

I think Mitt Romney in the light of honesty and full disclosure 

admits himself there is a lot in the Affordable Care Act that he can 

work with, that he would like to preserve if he was elected President. 

I thought that was a very revealing comment, but also not surprising given that he is the one that implemented his own health 

care reform, much of which was adopted with the Affordable Care 

Act here in Congress. 

Whether it is preexisting conditions, young adults staying on 

their parents’ plans, I think the Governor has acknowledged there 

is a lot of good aspects of the Affordable Care Act that should be 

preserved and should be protected. I thought that was a very revealing and helpful comment. 

I agree with Mr. Lewis. I think it is helpful for us to have from 

time to time oversight in hearings to see about the implementation 

of the Affordable Care Act, especially the IRS’ role in all of this. 

I think we have heard Mr. Miller testifying in regard to some of 

the resources that IRS is requesting and what that money is going 

to be used for. 

My sense is, and correct me if I am wrong, that the vast amount 

of the resources will be used as far as outreach and education and 

also some of the infrastructure needs that the IRS has in implementing the Affordable Care Act; is that right? 

Mr. MILLER. That is correct. The biggest amount of the $360 

million asked for in 2013 is actually for the IT build that we have 

talked about. A very small amount of it is enforcement or service, 


ccoleman on DSK8P6SHH1PROD with HEARING
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much of the balance is infrastructure to set up the processes to succeed. 

Mr. KIND. Mr. Lewis also asked you to respond to the outreach 

that is currently being conducted to the variety of stakeholders out 

there, whether it is businesses, individuals, tax preparers, things 

of that nature. 

How would you describe that relationship and that communication with a lot of the requests for information coming into the IRS 

today? 

Mr. MILLER. I think it has been robust. I think the second panel 

will be a perfect panel to talk to about that issue. I think overall, 

we have gotten a great response. Obviously, there is a great deal 

of interest, and most things, I think, people can live with and some 

things, they are continuing to talk to us about, which is the nature 

of a decent discussion, I believe. 

Mr. KIND. Will the IRS be involved at all in the enforcement of 

the Affordable Care Act, the requirement for health insurance for 

individuals? 

Mr. MILLER. We will. That is a tax provision. 

Mr. KIND. To what extent will you be involved with that? Will 

this be conducting audits of individuals or businesses or what? 

Mr. MILLER. I think, if I understand the question, Mr. Kind, 

and I alluded to this in my oral, with respect to the individual coverage provision, the IRS will, I believe—we have talked about 

this—there will not be revenue agents involved in this. These will 

not be audits. This will be a matching process. It will be something 

similar to what we see when we get in bank information with interest on it. 

There will be a match to see whether there has been insurance. 

There will be correspondence with the individual, if it looks like 

they are not entitled to an exemption, and they will have the ability to converse with us about whether or not there should be a payment or not. 

To the extent there is a payment, the statute is very clear in 

what we can and cannot do. We cannot do liens. We cannot do levies. We cannot do seizures. We cannot do criminal prosecutions. 

The vast majority of people in this category, they will pay the 

money they owe. That is the way the American system works. More 

than 70 percent of the money that we collect from the balance of 

dues is collected not through drastic collection action, but when we 

correspond with someone, when we give notice or other correspondence. 

I have no doubt that most people will comply with the payment. 

Those that do not, we have a limited amount that we will be able 

to do with respect to them, and we have talked about that at the 

end of the day, it might be an offset of—— 

Mr. KIND. Some opponents in the past of the Affordable Care 

Act claim the IRS is going to have to staff up to the tune of 16,000 

enforcement agents. Is there any basis for that number? 

Mr. MILLER. There is no basis for that number. 

Mr. KIND. Thank you, Mr. Miller. Thank you, Mr. Chairman. 

Chairman BOUSTANY. Thank you, Mr. Kind. Before we go to 

Mr. Marchant, just a quick follow up. I know you mentioned a significant amount of money requested for IT implementation. I just 


ccoleman on DSK8P6SHH1PROD with HEARING
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want to remind you that Mr. Lewis and I sent a letter not long ago. 

We are still waiting on a response. 

It is about the IRS and what is going on with the money and the 

allocation for IT. 

Mr. MILLER. We will get you that letter this week. 

Chairman BOUSTANY. I appreciate it. Thank you. Mr. 

Marchant? 

Mr. MARCHANT. Thank you, Mr. Chairman. Mr. Miller, I would 

like to explore the new concept to the IRS of the household income. 

Since it is a brand new concept, is it a legal concept to the IRS at 

this point? 

Mr. MILLER. It is in the statute itself. It is defined in the statute. It is a statutory provision. 

Mr. MARCHANT. Has the IRS made preliminary findings on 

what constitutes a household? 

Mr. MILLER. I think we have. I think the statute sets it out. 

The statute basically says modified or adjusted gross income, which 

basically is off your tax return. The only twist to that is you have 

to add in for your family size, where you are taking a dependent, 

and that dependent is filing a tax return, that dependent’s income 

has to be added in as well. That is the only real difference. There 

are very few people in that category, Congressman. 

Mr. MARCHANT. Is it the IRS that will be the final person who 

decides what constitutes that household unit or will it be the exchanges? 

Mr. MILLER. I believe, if I am understanding the question, that 

the IRS will be providing the exchange with information on any dependents that are filing a tax return in that unit. 

Mr. MARCHANT. If you have two people unmarried living under 

the same roof, each having a child, will that constitute a household, 

and which of the tax returns will be the main tax return that will 

constitute—that will apply to the exchange? 

Mr. MILLER. I will come back in writing if they tell me I am 

wrong, Congressman, but it is going to depend on who is taking 

whom as a dependent. The household is that individual who has 

some people being taken—who is taking some people as a dependent on their return. 

I do not know in a given situation whether the two unmarried 

folks have a dependency relationship in that respect or not or 

whether the children do or not. It really is going to depend—the 

definition of ‘‘household income’’ is your modified adjusted gross income subject to some foreign provisions in tax exempt interest, and 

the income from those who you have taken on your return as a dependent provided that dependent has filed a tax return. 

Mr. MARCHANT. If you had two adults living in the same 

household that filed separate tax returns, would a married couple 

filing separate tax returns be constituted as a household? 

Mr. MILLER. Well, I will answer the question in a different way, 

which is if you are married under ACA, to get the premium tax 

credit, you must file married, filing jointly. That is an eligibility requirement for the credit. 

Mr. MARCHANT. The physical living together has no part of the 

definition of ‘‘household.’’ It is defined by virtue of the IRS Code, 

purely? 


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Mr. MILLER. The physical proximity might have an impact on 

the dependency claim on the tax return. Again, it ties off to whether you are a dependent on that person’s return. 

Mr. MARCHANT. For the first time ever, it will be the IRS’ job 

to compile this and go through a separate step and define ‘‘household income?’’ 

Mr. MILLER. The only separate step, Congressman, is including 

the income from a dependent who is filing a tax return. To be quite 

frank, you should have a general feel for what that income is if you 

are taking that person as a dependent because that is part of the 

test of taking that person as a dependent. 

Much of that if not all of that discussion should be occurring already. 

Mr. MARCHANT. Heretofore, all of this information has been 

passed to the states and HHS basically on an individual basis, an 

individual tax return basis. 

Mr. MILLER. Rather than as a household. I do not know the answer to that one, Congressman. I apologize. 

Mr. MARCHANT. Will the states get more information about 

households and IRS returns and will there be more people at the 

state level able to view more information about a person’s IRS income and IRS status than ever before? 

Mr. MILLER. To the extent that the exchanges are using this for 

eligibility purposes, then those are new purposes, and probably 

new people that are taking a look at that data. 

Mr. MARCHANT. Thank you. 

Chairman BOUSTANY. Mr. Reed. 

Mr. REED. Thank you, Mr. Chairman. Thank you, Mr. Miller, 

for being here today. 

I just want to follow up quickly before I get to another point on 

Mr. Kind’s comment. When he asked you about the 16,000 new employees for the IRS, you quickly and confidently said there was no 

basis for that number. 

It is clear to me that you have taken a look at that situation in 

depth to be able to make such a quick response and confident response. 

What I am going to ask you, Mr. Miller, is in 2012, I believe 

there were 1,278 additional employees to implement the Affordable 

Care Act that were requested and put forth in the IRS. In 2013, 

859 new employees. 

Do you agree with those numbers of employees that were increased in the staffing for IRS to implement the Affordable Care 

Act? 

Mr. MILLER. No. It is a mis-reading. The total number of people 

working on ACA in 2012, and I will be wrong on the specific number, but something like 670. 

Mr. REED. 670 for 2012. For 2013, how many new employees 

will be doing that work, or is it just 670 is all you are going to 

need? 

Mr. MILLER. It is the 670 plus the increment to get to the 859 

you were talking about. 859 is the total number of folks. 

Mr. REED. 670 in 2012 and the difference between 859 and 670 

would be the increase for 2013. 

Mr. MILLER. Right. 


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Mr. REED. From 2012 to 2013, the testimony is 859 new employees? 

Mr. MILLER. No, sir. 

Mr. REED. I am confused. Please correct me. 

Mr. MILLER. Again, the total number of employees will be 859 

employees in 2013. They are not additive. We already have 670, 

whatever the math is. I cannot do the math off the top of my head. 

Mr. REED. The total for the 2 years, 2012 and 2013, is 859? Is 

that what you are saying? 

Mr. MILLER. No, I do not think I am saying that. I am saying 

in 2012, we had 670 people work on it. In 2013, our intention is 

to have 859 work on it. They are separate numbers. 

Mr. REED. Let’s go forward, 2014, the bulk of the law goes into 

further implementation, how many additional employees do you 

feel are going to be either hired or allocated to implement the Affordable Care Act thereafter? 

Mr. MILLER. That number we are working on as we speak. We 

have a draft 2014 budget that is floating up into a discussion with 

Department of Treasury, OMB, and that will be part of the administration’s budget. 

Mr. REED. Okay. You are working on an estimate, you are working on a proposal. What does that estimate show you right now at 

this point in time? 

Mr. MILLER. I do not have that number for you because again, 

it is an estimate and it has not been approved. 

Mr. REED. You are working on it, I would hope. 

Mr. MILLER. Yes, we are working on the 2014 budget, which is 

due in January. 

Mr. REED. The employment needs for the IRS in 2015 and beyond, I hope you are doing some projections as to what you are 

going to need in order to implement the law. 

Mr. MILLER. That becomes more difficult because again we operate on an annual basis. We are working on 2014 and we will see 

what we have in 2014, and that will inform along with where we 

are on various other business processes, what we desire in 2015. 

We do not have details. 

Mr. REED. That concerns me, Mr. Miller. You are the agency 

that has been responsible or charged with responsibility for implementing this law. What you are telling me is you really do not have 

a clear indication as to what employment burdens are going to be 

put on the IRS as a result of this law. That is very concerning to 

me. 

Would you agree that is concerning to a Member of an oversight 

Committee on your agency, that the agency should have some type 

of projection as to what those employment burdens are going to be 

and the costs associated? 

Mr. MILLER. Mr. Reed, I understand your point, and if you were 

to give me a budget for multiple years, I might have a better sense 

of what I could do or not. 

The budgetary process is an annual process. It is difficult for me 

given the scenario of budgets to have a precise number for you at 

this point for 2015. We are working on 2014, sir. 

Mr. REED. How about anything past 2015? Nothing? 

Mr. MILLER. We will be in steady state in 2016, sir. 


ccoleman on DSK8P6SHH1PROD with HEARING
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Mr. REED. I have a few more minutes, I hope. I want to talk 

about the premium tax credits real quick. My understanding is the 

advance payment for that goes to the insurer. 

Mr. MILLER. The insurance company. 

Mr. REED. The insurance company, not the insured, but the insurer, which is the insurance company. 

Mr. MILLER. Correct. 

Mr. REED. If there is an over credit, and I know I am short on 

time, do you go back to the insurance carrier to get that over payment or do you go to the individual taxpayer? 

Mr. MILLER. I would be glad to answer it. I am not sure I understand the question, sir. I apologize. 

Mr. REED. Okay. I am out of time. I do want to follow up on 

that. I am concerned that the money goes to the carrier and yet 

the taxpayer ultimately, if it is an over payment situation, the 

money never gets from the carrier back to the individual. It comes 

from the IRS which then comes from the taxpayers. 

Mr. MILLER. There will be a reconciliation process on both ends. 

Mr. REED. I will submit written questions on that. I appreciate 

your input, Mr. Miller. I really do. Thank you. I yield back. 

Chairman BOUSTANY. Thank you, Mr. Reed. If you could respond to that final piece in writing. 

Mr. MILLER. We will do that. 

Chairman BOUSTANY. Thanks, Mr. Miller. 

Mr. Paulsen. 

Mr. PAULSEN. Thank you, Mr. Chairman, for conducting the 

hearing. Mr. Miller, last week we heard from the IRS about plans 

to publish revisions to Form 637 very soon. 637, that is the application for registration dealing with excise taxes in particular. 

In reviewing this form, I am looking at the form, I know there 

are a lot of items that are listed that are subject to the excise tax. 

Items like gas guzzler automobiles, sports fishing equipment, fishing tackle boxes, bows, quivers, broadheads, points, arrow shafts, 

also alcohol, tobacco and gasoline are subject to an excise tax. 

The public policy rationale in the past for excise tax has historically been to deter certain activities. As you know, the medical device tax, which is a part of the new health care law, is an excise 

tax. In my mind, the last thing we want to do is deter creation or 

innovation of these life saving, life improving drugs. 

Do you believe as a matter of public policy it is appropriate to 

apply an excise tax to medical devices in a similar category as 

these other items? 

Mr. MILLER. Congressman, I only administer it. I cannot really 

speak to whether it is appropriate policy in terms of use or not. 

Mr. PAULSEN. Do you think the line item we might see on a 

Form 637 is going to also include gas guzzling automobiles and life 

saving medical devices? Will there be a line item that will identify 

it for medical device companies in that manner? 

Mr. MILLER. I do not know specifically. We are working hard. 

We have proposed regulations out on the medical device tax. We 

are working with the industry to make sure we try not to burden 

them and get them to know the rules and comply going forward. 

I am not sure on the form itself. I am not familiar with it. 


ccoleman on DSK8P6SHH1PROD with HEARING
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Mr. PAULSEN. According to the new law, the companies will 

have to begin paying this tax on January 1, which is just a few 

months from now. Am I correct in my understanding that no final 

rule has been released by the IRS yet on this? 

Mr. MILLER. Right. That is close, sir. 

Mr. PAULSEN. Without clarity of the rules, you said you were 

working with the industry, but I know they are expressing concern 

about having to comply with the new law, certainly. You say you 

are working with them? 

Mr. MILLER. We are. 

Mr. PAULSEN. There are about 7,000 of these companies across 

the country. They do a lot of medical devices. It could be diagnostic 

equipment. Many of these companies are not profitable. They are 

still going to be required to pay the tax. This fact does not take into 

account the administrative burdens of the tax that will come 

through the new IRS form, for instance. 

Has the IRS done a Paperwork Reduction Act analysis to measure the administrative burdens of the device tax on companies? 

Mr. MILLER. I do not know the answer to that. I can get back 

to you on that, sir. 

Mr. PAULSEN. That would be good to know. I am just curious. 

Mr. MILLER. If I could say one thing. The burden that has been 

placed on—it is a statutory provision. We did not create this out 

of whole cloth, sir. 

Mr. PAULSEN. I know there is going to be additional paperwork, 

costs for companies to comply with the tax. It is also my understanding that the excise tax payments are traditionally collected 

semi-monthly or every 2 weeks. 

Do you think that model would fit for many of these companies 

which have the experience essentially of making estimated income 

tax deposits on a quarterly basis, but they do not have any experience in the Federal excise tax component, and I do not think they 

have systems in place for calculations. 

Is there consideration being taken into account for that? 

Mr. MILLER. I do not know the answer to that question either, 

sir. Again, we are working with them. The proposed regulations are 

out. The number of issues, Congressman, are not a myriad. There 

are a few issues that remain unclear and we are working with 

them on. A lot of this has been put out and discussed. 

Mr. PAULSEN. Okay. Mr. Chairman, I just raise some of these 

issues because I think we are clearly going in a precarious situation or dangerous situation for a lot of these companies that provide a lot of jobs, it is domestic manufacturing, and we have analyzed a little bit of what the effects of the tax would be. 

We have tried to stop it. We have repealed it in the House in a 

very strong bipartisan vote. 

Now that we are moving forward on January 1 and these companies are laying off employees already, I want to make sure we are 

also taking into account the paperwork connections and the IRS 

following up on the Paperwork Reduction Act analysis and process 

as well. 

I yield back. 

Chairman BOUSTANY. I thank the gentleman. I think the gentleman is correct in that we have a lot of uncertainty in the policy 


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of the law but also concerns about the implementation, too, and the 

timing. 

This is creating uncertainty for business, and it is certainly not 

helping our economy. 

Ms. Black, you are recognized for 5 minutes. 

Mrs. BLACK. Thank you, Mr. Chairman. Mr. Miller, I want to 

go to the privacy issue. As we know, there are few things more sacrosanct to people than having their tax information known broadly 

and widely to other folks. 

An entire section of the Tax Code, Section 6103, as you well 

know, is devoted to limited instances in which this information can 

be shared, but in the wrong hands, taxpayer information can be 

used to steal tens of thousands of dollars from the Treasury. We 

have already seen instances of that. We have had hearings here related to that matter. 

It contains information of a personal nature, about personal finances, and family information. 

Underneath of the President’s health care law, the IRS will be 

sharing this information, this taxpayer information, more broadly 

with many more parties than you ever have before. 

While the IRS already shares some of this data with places like 

child support, we have heard about that in testimony, Medicaid 

and some other revenue collection situations, this new sharing is 

going to be much broader, especially since the exchange employees 

will be taking place. 

How do you plan to make sure this information is fully protected? 

Mr. MILLER. Congresswoman, this is what we do. We do this 

quite a bit already. We have hundreds of agreements with various 

governmental agencies. 

The process is quite restrictive actually, and I think if you would 

talk to other agencies, they would tell you how restrictive we are 

in terms of making sure that the information that is sent needs to 

go—once it arrives, it is stored properly, it is subject to appropriate 

controls in terms of who has access to it, and is subject to either 

destruction or return to the IRS when it is no longer needed. 

These are rules, and I can outline these in writing, these are 

safeguard rules, that we have an entire part of the IRS working 

with folks on. 

We will come to an agreement with a particular government entity or the exchange as to what is the expectation of what will happen with that data. We will then go on-site and inspect to ensure 

that document is correct. 

We have quite detailed rules in the area because we take it incredibly seriously. 

Mrs. BLACK. You already have memorandum’s of understanding 

with agencies and exchanges? 

Mr. MILLER. Not exchanges at this point, I do not believe. 

Mrs. BLACK. Not exchanges. You say you already have rules in 

place? 

Mr. MILLER. We have rules in place generally, Congresswoman, 

for this sort of situation. 

Mrs. BLACK. Okay. Can you provide us with what you are doing 

with those agencies as that comes along? I think that will be imVerDate Mar 15 2010 00:25 May 30, 2013 Jkt 080693 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80693.XXX GPO1 PsN: 80693

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portant for this Committee, considering the fact, as I say, we have 

already had hearings about how taxpayer information is used by 

people to fraudulently get their return, get money back that does 

not belong to them. 

I think it would be important for this Committee, this oversight 

Committee, to know that we are protecting even more information 

with even more people that are going to have access to this. 

My next question is what will be the repercussions against exchange employees or contractors that mis-use taxpayer information? Do you already have something in place? 

Mr. MILLER. I will come back to you on that, but I believe they 

are subject to the same restrictions as I am in terms of being subject to criminal prosecution and other penalties for disclosing that 

information. 

Mrs. BLACK. I would appreciate you keeping this Committee in 

touch with what you are doing so we can be sure that absolutely 

is happening considering all the things that are happening with 

people’s information right now. 

Thank you. I yield back the balance of my time. 

Chairman BOUSTANY. Thank you. Mr. Miller, I think that concludes our questioning. We appreciate you being here today and 

providing this information. 

Of course, there is more work to be done as we look at the implementation of this. We look forward to hearing from you in the future. We appreciate your testimony and your forthright answers. 

Mr. MILLER. Thank you. 

Chairman BOUSTANY. We are going to ask the next panel to 

come forward, and we will start taking testimony. We will recess, 

as I mentioned earlier, to attend the commemoration, and then we 

will resume at 11:30. 

We will ask the next panel to come up and we will try to get 

through some of the testimony. 

I want to thank our next panel of witnesses for being with us 

today. We have four experts on this subject. 

First, we will hear from the Honorable Fred Goldberg, a partner 

of SkaddenArps, a law firm here in Washington, DC. Mr. Goldberg 

is a former IRS Commissioner, former Assistant Secretary of Treasury for Tax Policy. 

Next, we will welcome Kathy Pickering. Ms. Pickering is Executive Director of The Tax Institute and Vice President of governmental Relations at H&R Block. 

Third on the panel is Scott Hodge. Mr. Hodge is President of The 

Tax Foundation here in Washington. 

Finally, we will hear from Mr. Seth Perretta, a partner of the 

law firm Crowell and Moring. 

We want to thank you all for being with us today. The Committee has received your written testimony and it will be made 

part of the formal hearing record. Each of you will be recognized 

for 5 minutes for your oral remarks. 

Mr. Goldberg, we will start with you for 5 minutes. We will try 

to get through two statements. We will recess and come back 

promptly at 11:30. 

Mr. Goldberg, you may proceed. 


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STATEMENT OF FRED GOLDBERG, JR., PARTNER; SKADDEN, 

ARPS, SLATE, MEAGHER & FLOM 

Mr. GOLDBERG. Mr. Chairman, Ranking Member Lewis, Members of the Committee, it is an honor to appear before you today 

to discuss the impact of certain revenue provisions of the Affordable Care Act on taxpayers and the IRS. 

I am appearing today solely in my individual capacity. 

Many years ago, I had the pleasure of appearing before this 

Committee during my time as IRS Chief Counsel, as IRS Commissioner, and as Assistant Secretary for Tax Policy. 

Your Committee has a long bipartisan history of concern for effective tax administration and your efforts have served the American people well. 

Before starting, I would like to make a preliminary observation. 

The administrative, behavioral and tax compliance issues you are 

considering are inherent in any policy that provides phased out tax 

credits to subsidize the purchase of health insurance, including, for 

example, the Ryan-Wyden proposal. They are not unique to the Affordable Care Act. 

Much of my written statement explains in some detail why my 

experience as IRS Commissioner convinces me that the revenue 

provisions of the Act in their current form will become a burdensome, costly, and frustrating quagmire for millions of Americans, 

and will cause significant non-compliance with our tax laws. 

My oral statement does not address portions of my written statement dealing with adverse impact of the Act’s financial incentives 

on employers and individuals, but I will be happy to answer any 

questions. 

What I want to emphasize today is my experience as IRS Commissioner also convinces me that these failings are unnecessary 

and are easily minimized. 

Chief Justice Roberts and four of his colleagues have decided 

that the revenue provisions of the Act are all about the government’s taxing power. 

I believe they got it right and the best way to avoid administrative, behavioral and tax compliance melt down is to embrace this 

reality. 

First, now that we know the revenue provisions are all about the 

government’s taxing authority, there is no longer any reason whatsoever why each of 51 different exchanges should have responsibility for determining the proper amount of health insurance tax 

credits on behalf of millions of individuals and families. 

The exchanges will be starting from scratch with information 

that is 2 years out of date because personal and financial circumstances change. Change is the one constant in our real lives. 

The exchange’s credit calculations will be too high or too low most 

of the time. Now, in hopes of getting it less wrong, each exchange 

will need to obtain sensitive personal and financial information 

from millions of individuals and families and it will need to do so 

throughout the year because life’s changes do not follow the bookkeeper’s calendar. These efforts will require direct interaction with 

millions of individuals and families in ways that meet their reasonable expectations and allow them to make timely decisions. 


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Decades of IRS experience make clear that as citizens, we want 

our questions answered and our issues resolved promptly, properly, 

and in ways we understand. We are sharing intimate details of our 

personal and financial lives and expect that our information will 

remain confidential, and because the stakes are so significant, our 

health and hard-earned money, we have high expectations and little tolerance for mess ups. 

These responsibilities are not going to be core competency of the 

exchanges. There is no reason they should be and there is no 

chance the exchanges will get it anywhere near right. They are facing more than enough challenges without functioning as some 

weird hybrid of tax advisor and tax enforcer. Let folks figure out 

their expected credits with support from a long-established network 

of public and private intermediaries and let them make appropriate 

representations to their exchanges. They have been doing this kind 

of thing for decades in their dealings with the IRS. Taking the exchanges out of the picture will make things far less intrusive, burdensome, and costly and will save the exchanges a fortune. 

Second, from the standpoint of tax compliance, the current sanctions for overstating the amount of health insurance tax credit, 

coupled with limits on IRS enforcement activities, effectively guarantee that there will be widespread noncompliance. To avoid these 

compliance issues, treat these taxes like all other taxes. 

Thank you very much. 

[The prepared statement of Mr. Goldberg follows:] 


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Statement of Fred T. Goldberg, Jr. 

Before The Committee on Ways and Means, 

Subcommittee on Oversight 

Hearing on IRS Implementation and Administration of 

The Affordable Care Act 

September II, 2012 

Mr. Chairman and Members of the Committee, it is an honor to appear before you today to 

testify on the administrative and compliance implications of the Affordable Care Act (the 

"ACA") as they affect the IRS and taxpayers. I had the pleasure of appearing before this 

Committee many, many years ago during my time as IRS Chief Counsel (1984-1986), IRS 

Commissioner (1989-1991), and Treasury's Assistant Secretary for Tax Policy (1992). Since 

1992 I have been a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom. I am 

appearing today in my personal capacity and not on behalf of Skadden or any finn client. J 

Based on my experience as Commissioner, I believe the ACA in its current form will be a 

needless administrative and compliance quagmire for millions of Americans and that the 

ACA's powerful financial incentives will lead to significant unintended consequences that 

policy makers very much want to avoid. At the conclusion afmy Statement I make several 

recommendations to address these concerns. 

An Administrative Qua9mire: The ACA promotes access to insurance through a phased out 

tax credit for individuals and families who purchase coverage on the Exchanges. The law as 

written requires the Exchanges to determine the amount of this credit based on two-year 

old tax return information. 

The only thing we know for sure is that two-year old tax return information is virtually 

certain to be wrong. That is because - in the real world - the only constant is change. The 

millions upon millions of tax returns filed each year demonstrate that we live in a truly vibrant 

and dynamic country where change is constant. Individuals fonn families. Families have 

children. Children grow up and leave. Sometimes families fall apart. Families move. Children 

go to school, graduate, get jobs, form new families. Real people get jobs, lose jobs; get 

promotions. Workers are demoted. laid off or fired; they go back to school and find second 

careers; they start businesses that fail, prosper. or succeed beyond their wildest imaginations. 

Illness. disability and death happen. Organizations fonn, prosper. fall apart; they change, for 

better or worse. The list goes on and on. What this means is that in most cases the amount of 

the tax credit subsidy computed by the government-run Exchanges will be wrong. 

I would like to acknowledge Susannah Carnic, my Fonner colleague at Skadden, Arps and currently an Assistant 

Professor (Tax) at the University of Wisconsin Law School (Madison), for her assistance in preparing this 

Statement. All errors and omissions are solely my own. 
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In turn, what this means is that millions of individuals and families will be required to 

interact with their government every year to correct these errors. On the front end these 

interactions will be with the Exchanges; on the back end these Interactions will be with the 

IRS. 

The business process that this system requires is extremely complicated. Following is a 

high-level view of what's required: 

)- Every fall, in the course of selling health insurance to millions of individuals and 

famiHes for the coming year, the Exchanges will have to determine: 

o Whether the individual or family is eligible to purchase on the Exchange -

which requires knowing, among other things, whether the individual or 

family is covered by employer-provided insurance or is eligible for 

Medicaid? 

o The amount of each purchaser's health insurance tax credit, so that the 

Exchange can let the Individual or family know the amount of his, her or 

their net insurance premium after subtracting the credit. The Exchange is 

required to make this determination by starting with IRS tax return 

information that is two years out of date. 

)- Every fall during the course of purchasing health insurance from their Exchanges, 

millions of individuals and families will sort out which policy best meets their needs 

and the amount they chose to spend, taking account of their premium costs net of 

their tax credits. Because the Exchanges are starting with two-year-old tax return 

information, and because in most cases their personal and financial circumstances 

win have changed, the only thing we know for sure is that the credit computation 

made by the Exchange is going to be wrong most of the time. Millions of individuals 

and families will face one of two challenges: 

o Millions of Americans whose financial circumstances have changed In ways 

that entitle them to a bigger credit will endure a burdensome and sometimes 

degrading process of pulling together and sharing their intimate personal 

information with workers or contractors hired by the Exchanges in hopes of 

obtaining a higher credit and lower net price for the coming year. 

o Millions of Americans whose financial circumstances have improved will 

wrestle with the question of whether and how to reduce their tax credit and 

increase the net price of their insurance for the coming year - or "let it ride" 

and sort things out with the IRS down the road. 

o Individuals and families have been determining their tax liability, figuring out 

the proper amount of withholding and estimated tax payments, and sharing 

sensitive information with the IRS for decades. The process is far from 

perfect, but it works well most of the time. A threshold question is whether it 
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makes sense to put miHions of Americans through a similar process in 

dealing with newly created health insurance Exchanges. 

). Compounding these challenges, the foregoing is more than a fall ritual Because 

individual and family circumstances change throughout the year: 

o The Exchanges will have to figure out how miHions of individuals and 

families can change their coverage and redetermine the amount of their 

credits during theyear, a task made more difficult when individuals move 

from one state to another. 

o In tum, individuals and families whose circumstances do change during the 

year will need to decide whether and how to go through the redetermination 

process established by the Exchanges. 

)- Every year, the IRS is going to prepare tax forms that allow taxpayers who 

purchased insurance on an Exchange to determine the amount of health insurance 

credit (if any) to which they are entitled. 

). Every year, the millions of taxpayers who have purchased insurance on an Exchange 

are going to use those forms in preparing and filing tax returns. 

). Every year, the Exchanges are going to share information with the IRS regarding the 

amount ofthe health insurance tax credit that each individual and family received 

during the prior year. 

)- Every year, the IRS is going to process those returns and identify three potential 

compliance issues that it will need to address: 

o The IRS will first determIne whether the individual or family has properly 

computed the amount of their health insurance tax credit based on the 

information provided on their return. The IRS will correct any "math errors" 

and notify the individual or family.' 

o On an overall basis, has the family paid the amount shown as due on their 

return? This is an overall determination because, for example, the family 

may have received "too much" of a health insurance tax credit while at the 

same time being over-withheld on its wages. What this means is that while 

the size of the credit will affect the amount oftax owed, it will not determine 

2 DURING 2011 THE IRS ISSUED 5.9 MILLION MATH ERROR NOTICES. INTERNAL REVENUE SERVICE, 2011 DATA 

BOOK 38 (201 1). 
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whether the family owes money to the IRS or is entitled to a refund from the 

IRS.' 

o Is the information on the family's tax return correct, or has the amount of the 

health insurance tax credit been over or under stated? 

This all may sound relatively straight forward, but it's not Before discussing why, I want to 

make two pOints. 

First, love it or hate i~ the ACA Is the law of the land. As demonstrated by the ongoing work 

of the career IRS professionals charged with implementing portions of the ACA, and as 

Illustrated by proposed regulations recently issued by the Department of Health and 

HUman Services allowing individuals and families to update information on their out-ofdate tax returns, 4 the Administration is taking laudable and appropriate steps to 

implement the ACA. They deserve bi-partisan praise for their efforts. 

Second, any health care reform that relies on a system of progressive subsidies faces 

similar challenges. Thus, for example, the Ryan-Wyden reform proposal faces the same 

administrative and compliance challenges that were confronted by the ACA. 

Based on my experience as IRS Commissioner, despite the Administration's praiseworthy 

efforts, I believe implementation of the ACA's tax credit provisions is going to be a massive 

administrative and enforcement quagmire. 

One reason is the shear magnitude of the undertaking. Millions of individuals and families 

are going to purchase insurance on the Exchanges each year. The CSO currently estimates 

that persons covered through furchases of insurance on the Exchanges will be 9 million in 

2014 and 23 million by 2006. These are huge numbers, especially given the complexity of 

what's involved. IRS data helps demonstrate the enormity of what needs to be done: in 

2011 the IRS issued 5.9 million math error notices, conducted 1.2 million correspondence 

audits, closed 4.7 million automated under reporter cases, closed 1.4 million substitute for 

return cases, dealt with 45 million collection cases involving returns that were fil ed 

showing a balance due, and handled through live contact 34 million taxpayer assistance 

requests. 6 These activities are costly and require an experienced and well-trained workforce. 

DURINO 20 11 THE IRS RECEIVED 45 MILLION RETURNS SHOWING THE UNDERPAYMENT OF TAXES DUE. INTERNAL 

REVENUE SERVICE, 201 1 DATA BOOK41 (2011). 

76 Fed. Reg. 5 1233 -34 (2011) (to be codified at 45 C.F.R. pI. ISS) (proposed Aug, 17, 2011). 

STAFF OF THE CONGo BUDGET OFFICE, I 12TH CONG" ESTIMATES FOR THE INSURANCE COVERAGE PROVISIONS 

OF THE AFFORDABLE CARE ACT UPDATED FOR THE RECENT SUPREME COURT DECISION (Aug, 2012). 

INTERNAL REVENUE SERVICE, 2011 DATA BOOK 23, 37, 38,41 , 47 (201 1). 
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A second reason is that despite what some policy makers 1ike to assume, the circumstances 

for virtually all of these individuals and families will change from year to year in ways that 

will have an impact on whether they are eJigible to purchase on the Exchange, the policy 

that best meets their insurance needs, their financial circumstances, and the amount of 

credit that they are entitled to receive. 

Individuals and Families Who Purchase on the Exchanges: The purchase of health insurance 

is a very big deal for each individual and each family. It is a major financial commitment 

that plays a central role in his, her, or the family's well-being. By requiring the Exchanges 

to deal with each of these individuals and families to make upfront and (If pennitted) 

ongoing tax credit determinations is a truly massive undertaking. It is a complex and very 

expensive process because - to get it right - each Exchange will need to develop a 

sophisticated and responsive infrastructure that can deal with each participant's unique 

circumstances in ways that meet the reasonable expectations of each individual and each 

family. And the Exchanges will need to do so in "real time" because each individual and 

each family will need to know in very short order the net cost of his, her or their cost of 

insurance for the year. 

Decades of IRS experience provide considerable insight on what citizens expect - and are 

entitled to receive - in dealing with their government. We want our questions answered in 

ways we understand and in ways that make sense. We don't want bureaucratic nonsense. 

We want to be treated with courtesy and respect We don't want to be treated like 

supplicants, dummies or big pains in the collective bureaucratic rear-end. We want to deal 

with real people. We don't want to deal with computers. We want our issues resolved 

qulck1y and properly. We don't want a run-around from office to office and person to 

person. We are sharing intimate details of our private lives and expect that information to 

be treated with dignity and remain confidential. And because the stakes are so significantour health care and our money - we have high expectations and very little tolerance for the 

inevitable mess ups. 

The Exchanges: These expectations, and the government's obligation to meet them, seem 

obvious. Unfortunately, in my experience policy makers either assume them away or 

ignore the difficulty and true costs of making it all happen in practice. 

The IRS faces similar challenges in responding to taxpayers, but on a much smaller scale 

and with far less time pressure. The IRS has decades of experience, devotes massive 

resources to the effort, and does a very good job. But the IRS is far from perfect and 

incremental improvements are slow in coming. 

The Exchanges will be well-intentioned and charged with carrying out an important task 

for the American people. But they will be starting from scratch - with no experienced 

workforce, no tested technology, and no history of dealing properly with confidential 

taxpayer information. It's a safe bet that they will not have anything like the resources they 

need to do the job the way it should be done. The Exchanges' task is made far more difficult 

because they must deal with every individual and family that seeks to purchase health 

insurance, and must do so in a window that allows for timely purchase decisions. Decades 
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of experience with tax administration suggest that the individual and family tax credit 

provisions of the ACA are going to result in a massive administrative quagmire that will 

leave millions of Americans angry, frustrated and more disaffected with our government 

In my judgment. this is what will happen absent significant changes in responsibilities 

imposed on the Exchanges. 

The IRS. Let's start with the dubious assumption that the IRS will not be inundated with 

questions at the front end about individual and family health insurance tax credits, not to 

mention all other aspects of the ACA. Under these circumstances, the IRS challenge will be 

how to deal with compliance issues at the back end. 

In a sense, the IRS task has been made easier in the short run because the ACA does not 

impose interest and penalties for over-stated credit claims, and the IRS has decided that it 

will only collect those excess claims through its refund off-set program. 

But that's just the short-run. Longer term, taxpayer behavior in response to the ACA and 

the ACA's tax compliance implications need to be considered in the context of incentives 

created by the ACA. To say they least. they are far from what Congress had In mind. 

Inevitable Decline In Employer-Provided Insurance Coverage and an Inevitable 

Increase In the Ta" Gap: 

A central lesson of my time as Commissioner and Assistant Secretary for Tax Policy, and of 

my career as a tax professional. is that financial and behavioral incentives provided by the 

tax law have a powerful impact on the behavior of individuals, families and institutions. 

Speaking from experience, policy makers say we get it, just like we say we "get" the 

difficulty of making our policies work in practice. But you'd never know "we get it" based 

on the incentives embedded in the ACA. . 

Over the years, the tax system has developed a massive infrastructure of advisors, return 

preparers and other intennediaries who work with taxpayers on how to navigate, comply 

with, take advantage of, and minimize the impact of every conceivable aspect of the tax law. 

From time to time, intennediarles get out of line, but on balance they are both inevitable 

and a good thing for the tax system. 

Given the stakes, the infrastructure of intermediaries is already emerging and there is 

already widespread consideration of the ACA's incentives and their potential Implications. 

For example: 

»- The modest "penalties" on businesses that drop or do not provide group coverage 

are tiny relative to the cost of providing group coverage - this means that 

businesses have a strong economic incentive to not start or drop group coverage for 

their employees. 

}> The credit for small businesses that do have group plans lasts for only two years. 

While this might sound attractive, the provision distorts the decision whether to 
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hire more employees and the two·year time limit means that small businesses are 

pocketing a short term benefit while making an expensive and uncertain long term 

commitment. For these reasons, the small business tax credit is a modest incentive 

for small businesses to continue their policies in the short run and provides no 

meaningful incentive for small businesses to start group coverage for their 

employees. As with other businesses, the far more powerful incentives run in the 

opposite direction. 

» The cap on the penalty tax paid by individuals and families who do not buy health 

insurance is far below the cost of buying insurance. Especially for young, relatively 

healthy individuals, the economic incentive is to take advantage of the pre·existing 

conditions rule and only buy insurance when needed. 

» The fact that excess health insurance tax credits claimed by individuals and families 

are not subject to interest and penalties provides economic incentives to error on 

the high side, go along with Exchange credit computations that are too high, or just 

plain lie to obtain excess credits. 

» The foregoing economic incentive is enhanced because the IRS will pursue collection 

only through its refund off-set program_ 

» About 80% of all individuals and families receive tax refunds, and those refunds 

average about $2,500. Under these circumstances, the IRS enforcement policy 

creates economic incentives for individuals and families who purchase on 

Exchanges to reduce the amount of the over-withholding that gives rise to refunds. 

The foregoing has two implications. First, there will be a significant decline in employer· 

provided coverage and the small business incentive will be ineffectual. Second, there will 

be significant non·compliance among individuals and families through the failure to 

purchase coverage until needed, the over-statement of health insurance tax credits (good 

faith and otherwise), and a longer term reduction in tax refunds that will increase IRS 

collection issues as a result of more "balance due" tax returns. 

I understand that all of this may sound unseemly. and some of it is. But decades of 

experience with tax administration tells us that this is going to happen. And I believe it 

will. 

Is There Anything That Can Be Done to Reduce the Impact of These Challenges? 

I believe the answer to this question is yes. Now that Chief Justice Roberts and four of his 

colleagues have determined - correctly in my view - that the revenue provisions of the ACA are 

all about the government's taxing authority, it is time to stop pretending. 

First, do not give the Exchanges responsibility for detennining the amount of tax credits that 

individuals and families are entitled to receive based on two·year old tax return information. 

This will not be part of their core competency and there is no reason it should be. They have 
35 

f 

Chairman BOUSTANY. Thank you, Mr. Goldberg. 

Ms. Pickering, you’re recognized for 5 minutes. 

STATEMENT OF KATHY PICKERING, EXECUTIVE DIRECTOR, 

THE TAX INSTITUTE AT H&R BLOCK; VICE PRESIDENT, GOVERNMENT RELATIONS 

Ms. PICKERING. Good morning, Chairman Boustany, Ranking 

Member Lewis, and distinguished Members of the Oversight Subcommittee. Thank you for the opportunity to share H&R Block’s 

views on the IRS’ implementation of the Patient Protection and Affordable Care Act. 


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36 

H&R Block is the country’s leading provider of tax preparation 

services. In each of your districts, we have on average 37 offices, 

12 franchisees, and 323 preparers. We are one of the largest employers of military spouses in the nation and we work alongside the 

IRS to help taxpayers annually file about 25 million returns. 

Clearly, the implantation of ACA is a significant undertaking 

and we commend the IRS for the progress it has made; however, 

it will face numerous challenges and conflicting demands for resources. 

First, the IRS and HHS have two very different missions and focuses with respect to the ACA. HHS will focus on ensuring that everyone has healthcare coverage. The focus of the IRS will be on enforcing tax law, reconciling advanced payments of the premium tax 

credit, and collecting revenues from the various tax provisions of 

the ACA. 

For example, HHS has stated that an individual can enroll in an 

exchange, but using documentation from other sources to substantiate income levels; however, the IRS will require individuals to file 

a tax return to reconcile advanced payments of the premium tax 

credit. As a result, individuals may receive an unpleasant surprise 

when they find out that they have a tax liability because they improperly estimated their income. We recommend the IRS and HHS 

develop consistent processes for income verification and eligibility. 

Requiring individuals to provide tax return information is the most 

reliable, consistent way to provide this verification. 

The second area I wish to highlight is the need for finalizing regulations and educating the greater tax community. There are many 

key provisions that still need to be finalized in order to implement 

by January 1, 2014. As a franchisor, H&R Block is concerned about 

the impact and timing of new regulations on small businessowners. 

For example, small businessowners will need at least 4 months to 

plan and to determine if they will participate in a small business 

health options program where enrollment begins in October 2013. 

We recommend that, given the time required to publish regulations, the IRS should ensure all ACA regulations are proposed by 

April 30, 2013. 

To be successful, the IRS and HHS must also provide individuals 

with timely education and guidance. This may be one of the most 

challenging tasks the IRS will face in 2013. We recommend the IRS 

leverage the tax preparation community through the Return Preparer Initiative to amplify taxpayer outreach and education efforts. 

To do so, the IRS and its testing vendor need to ensure they have 

sufficient testing capacity across the country to meet the December 

2013 deadline; however, the IRS has ongoing operational challenges which will be magnified by the difficulties of implementing 

of ACA. Therefore, a third and final area of importance is ensuring 

readiness for the 2013 tax season. 

In the 2012 tax season, millions in refunds were delayed in the 

early season due to fraud system programming errors and transmission problems with the Modernized e-File System, coupled with 

a decrease in IRS toll-free phone services in 2012. Taxpayers dealt 

with increased hold times and a decreased level of service. The IRS 

must complete the full transition to the Modernized e-File System, 

continue to improve fraud controls, respond to late tax legislation, 


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and successfully implement the Return Preparer Initiative, all 

while handling the effects of a late start to the e-filing system currently set for January 22nd. This means that many early season, 

low-income filers will not receive their much needed refunds until 

well into February. 

We recommend that the IRS begin accepting and processing efiled returns no later than January 15, 2013. Additionally, the IRS 

should maintain legacy as a contingency and provide the framework they intend to use to determine if it will be deployed. More 

importantly, the IRS should promptly notify the tax preparation 

community and taxpayers of problems with processing returns. 

In conclusion, the IRS and HHS together have a daunting task 

ahead and the IRS should use the upcoming tax season to improve 

several key areas of tax administration in order to be better positioned to fully implement ACA. H&R Block looks forward to continue to working with the IRS in these and many other areas. 

Chairman Boustany, thank you once again for organizing today’s 

hearing and for the opportunity to testify. 

[The prepared statement of Ms. Pickering follows:] 


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H&RBlOCK~ 

WRITTEN TESTIMONY OF KATHY PICKERING 

VICE PRESIDENT OF GOVERNMENT RELATIONS AND 

EXECUTIVE DIRECTOR OF THE TAX INSTITUTE 

H&RBLOCK 

BEFORE THE HOUSE \VAYS AND MEANS SUBCOMMITTEE ON OVERSIGHT 

HEARING ON THE INTERNAL REVENUE SERVICE'S IMPLEMENTATION AND 

ADMINISTRATION OF THE AFFORDABLE CARE ACT 

SEPTEMBER 11,2012 

Chairman Boustany, Ranking Member Lewis, and distinguished Members of the Oversight 

Subcommittee, thank you for the opportunity to share H&R Block's views on the Internal 

Revenue Service's ("IRS") implementation and administration of the Patient Protection and 

Affordable Care of2010 ("ACA"). 

H&R Block is the leading provider of tax preparation services. Approximately 25 million 

returns are prepared each year by our more than 90,000 tax return preparers ("preparers") in 

10,000 offices, online, or via our software solutions. Through our tax offices we are one of the 

larger employers of military spouses, and in each of your congressional districts we have, on 

average, 37 offices, 12 franchisees, and 323 preparers. 

The ACA created new processes and interactions between the tax industry, the insurance 

industry, and government agencies that have not existed in the past. In addition to navigating 

these new processes and interactions, the ACA requires the IRS to promulgate regulations, create 

new forms, and provide extensive education to taxpayers and tax preparers, all while still 

perfonning its core functions of interpreting and enforcing tax law and collecting revenue. 

The implementation and administration of the ACA is a significant undertaking and we 

commend the IRS for the progress it has made thus far. The IRS clearly will face numerous 

challenges and conflicting demands for resources. With regard to those challenges and demands 

for necessary resources, we would like to address the following concerns: 

1. Disparate focuses ofthe IRS and the Department of Health and Human Services ("HHS") 

2. Finalizing ACA regulations and education of the greater tax community 

3. Resources and readiness for the 2013 tax season 

1. Disparate focuses of the IRS and HHS 

According to its mission statement, HHS is the United States government's principal agency for 

protecting the health of all Americans and providing essential human services, especially for 

those who are least able to help themselves. In contrast, the mission of the IRS is to provide 

America's taxpayers top quality service by helping them understand and meet their tax 

responsibilities and enforce the law with integrity and fairness to all. 

H&R Block, Inc. • One H&R Block Way· Kansas City, MO 64105 • \Vww.hrblock.com 
39 


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Although the IRS and HHS have historically worked together, by way of the Social Security 

Administration, the ACA creates a new, more complex interaction between these two diverse 

agencies. The agencies have two very different focuses with respect to the ACA, albeit having a 

common end goal. 

In general, HHS' focus for the implementation of ACA will likely include ensuring as many 

individuals and their families as possible, are enrolled in coverage through Affordable Insurance 

Exchanges ("Exchanges"), Medicaid, a Basic Health Program, or the Children's Health 

Insurance Program. The IRS' focus will include reconciling advance payments of the premium 

tax credit ("PTe") and collecting revenue from the various tax provisions of the ACA. These 

different focuses may lead to taxpayer confusion and unexpected tax debts as a result of 

overpayments of subsidies. 

For example, the determination of eligibility for advance payments of the PTe by an Exchange 

will presumably be more flexible than the IRS' reconciliation process at the end of the year. 

On one hand, Section 1411 (c)( 4 )(B) of the ACA gives the Secretary of HHS authority to change 

the manner in which Exchanges determine eligibility for advance payments of the PTe. HHS 

has promulgated regulations stating an individual does not have to file a tax return to enroll in an 

Exchange but instead can use documentation from other sources to substantiate income levels. 

An individual without tax return data may make an attestation of projected income, and have 

advance payments of the PTC paid on their behalf for 90 days or longer while the Exchange is 

verifying their income. An Exchange may also accept an applicant's attestation on a case-bycase basis if the applicant's information cannot be verified. I 

On the other hand, the IRS' standard tax collection requirements are much more stringent than 

HHS' requirements for enrollment and advance payments of the PTC. The IRS will require 

individuals to file a tax return to reconcile advance payments of the PTC and generally 

individuals must be able to substantiate income with tangible, verifiable evidence if the IRS so 

requests. If Exchanges are able to enroll individuals and use less strict income verification 

procedures than the IRS, individuals may receive an unpleasant surprise when they find out they 

are required to repay their subsidy tax credit because they estimated their income improperly, an 

error which may occur simply because they have not been required to file a tax return in prior 

years, if ever. 

Our recommendation: The IRS and HHS should develop consistent processes for income 

verification and eligibility. Requiring individuals to provide tax return information is the 

most reliable, consistent way to provide this verification. In fact, the IRS should encourage 

all taxpayers to file tax returns in 2013 that can be used to enroll in Exchanges in the fall of 

2013. Further, the IRS and HHS should more closely align to create a communications 

strategy to ensure uniform messaging of this requirement. The IRS has already started 

dialogue to more closely align these two agencies. H&R Block is certainly appreciative of 

this important first step, but recommends continuing with more formal discussions to 

achieve alignment. 

[Public Welfare, 45 C.F.R. §155.315 (2012) 

2 
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2. Finalizing Regulations and Educating the Greater Tax Community 

Finalizing Regulations: While the IRS has already provided numerous regulations, revenue 

procedures and rulings, and other fonns of guidance, they have not yet proposed or finalized all 

regulations necessary to implement the ACA. With a deadline of January 1,2014 for the 

implementation of most key provisions of the ACA, it may appear that the IRS has more than a 

year to promulgate regulations; in actuality, the IRS must complete this process much sooner in 

order to provide adequate time for individuals and businesses to plan for the effects of the ACA. 

While H&R Block does have concerns about the impact of the ACA on individuals, one of 

which we address later, what is more apparent to us is the impact and timing of new regulations 

on small business ovmers. As a franchisor, we are in contact with owners of small businesses 

daily. Our franchisees have communicated their concern over waiting for the [RS to propose and 

finalize regulations. The timing of the release of regulations could impact their ability to engage 

in strategic planning and effectively execute business plans. 

For example, businesses generally perforn1 strategic planning to detennine their employee 

benefit offerings and negotiate with coverage carriers at least three to four months before the end 

of the calendar year. In addition, open enrollment in Exchanges, including enrollment for those 

participating in a Small Business Health Options Program ("SHOP"), begins October 1,2013. 

This means small businesses will need, at a minimum, four months to plan for 2014 and to 

determine if they intend to participate in a SHOP. 

Our recommendation: Given the time required to complete the process of publicizing 

regulations, the IRS should ensure all regulations and other authoritative guidance related 

to the ACA are proposed by April 30, 2013. 

Educating the Greater Tax Community: As mentioned previously, individuals will need 

adequate time to prepare for the impacts of the ACA. The majority of taxpayers do not yet 

understand the ACA and how it will affect them. For the implementation of the ACA to be 

successful, the IRS and HHS must provide individuals with timely education and guidance. This 

may be one of the most challenging tasks the IRS will face in 2013. 

The ACA is complex and there is no one universal communication method that wi 11 be effective 

for all audiences. The agencies will need to educate individuals through mUltiple channels 

including television, the Internet, and social media. H&R Block suggests the IRS also consider 

private-public partnerships to disseminate information to taxpayers. While the IRS has not 

communicated any intent to leverage the tax preparation community for this purpose, we believe 

it is logical for the IRS to use the more than 700,000 PTIN holders to help with outreach and 

education efforts. 

Our recommendation: The IRS should leverage the tax preparation community, through 

the return preparer initiative, to amplify taxpayer outreach and education efforts. 

3. Resources and Readiness for the 2013 Tax Season 
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As demonstrated above, the implementation and administration of the ACA will require 

considerable resources. These new duties may dilute the IRS' ability to maintain focus on key 

initiatives and improvements to the delivery of the core functions of the IRS. If the IRS is 

unable to continue to focus on its core functions, taxpayers will be adversely affected. 

To ensure taxpayers are not adversely affected and instead are provided top quality service in 

2013, the IRS must address and correct problems identified in the 2012 filing season, complete 

the transition to full implementation of the Modernized e-File system ("MeF"), continue to 

improve fraud controls, be prepared to respond to potential late tax legislation, and develop 

strategies to successfully implement the Return Preparer Initiative ("RPI"), all while preparing 

for and handling the effects of a delay to the traditional acceptance date of e-filed returns. 

Tax Season Delays: The IRS has told the tax preparation industry it will begin accepting e-filed 

returns for tax season 2013 on January 22. This is five days later than the January 1 i h 

acceptance date in tax seasons 2011 and 2012, and seven days later than the January 15th 

acceptance date in tax season 2010. 

Given the standard refund delivery time of 10-21 days, a later than traditional start date for e-file 

processing means many early season filers will not receive their refunds until well into February. 

This delay will most likely negatively impact low income taxpayers, \vho often file in January to 

receive their refunds as soon as possible. With an average refund of more than $3,500 for 

January filers (according to the IRS' Cumulative Individual Income Tax Return Report for 

January 27,2012), this will be the largest lump sum of money most of those taxpayers will 

receive all year. 

Our clients rely on this money every year to catch up on rent and utilities, pay for holiday 

expenses, and make much needed repairs to their homes and vehicles. The absence of this much 

needed funding will disrupt the lives of many taxpayers, adding late fees and interest to their 

existing debts, and causing many to resort to alternative loans. Tfthe IRS does not provide 

taxpayers with advance notice of this delay, taxpayers will be completely unprepared to mitigate 

the effects. 

A delay in the processing ofretums and refunds will also increase the frequency, volume and 

urgency of phone calls to toll-free IRS customer service centers. A surge of this nature occurred 

in the 2012 filing season when fraud detection programming elTors and transmission problems 

with the MeF system delayed the receipt of refunds for approximately 12.5 million early filers. 

Coupled with a decrease in funding for toll-free telephone services in 2012, taxpayers were met 

with increased hold times and a decreased level of service. The tax preparation community and 

the IRS drew heavy criticism as a result. 

If the IRS does not move up the acceptance date for e-filed returns, and taxpayers are not given 

adequate advance notice of the impact of the delay, the IRS and tax preparation industry will 

again face criticism from taxpayers. Ultimately, the delay will hurt the taxpayers who need help 

the most. 

4 
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Our recommendation: The IRS should begin accepting and processing e-filed returns no 

later than January 15,2013. 

Modernized E-file, Late Legislation, and Fraud: January 2013 also marks a change for the IRS 

as they will be undertaking the important transition to full-implementation ofMeF. As 

mentioned previously, in tax season 2012 a number of returns were delayed due to programming 

errors and transmission problems with the MeF system. The IRS was able to remedy the delays 

by temporarily switching back to the legacy e-filing system ("Legacy"). 

Based on the lessons learned from the 2012 tax season, pmdence dictates the IRS maintain 

Legacy as a contingency for one more filing season. While maintaining Legacy is necessary to 

maintain operational continuity, the requirement to program two separate systems is burdensome 

for the IRS, H&R Block, and all other e-file software developers. The IRS has provided no 

framework for determining what circumstances would cause it to deploy Legacy. As such, it is 

unclear what purpose the additional work serves if there's no definition of what severe 

conditions will be mitigated or avoided. 

The challenge of maintaining and programming two systems is further compounded by the 

potential for late tax legislation and the need to create effective new processes and programs to 

detect and prevent fraud. With two separate systems on point, responding to late tax legislation 

and remaining nimble in an ever-changing fraud environment will presumably be twice as 

difficult. 

Our recommendation: The IRS should maintain Legacy as a contingency while making the 

transition to full-implementation of MeF. The IRS should provide the framework they 

intend to use to determine if and when Legacy will be deployed, and how deployment will 

be communicated to the tax preparation community. The IRS should also promptly notify 

impacted taxpayers of problems with return processing systems. 

Return Pre parer Initiative: H&R Block is supportive of the RPI and believes it will help raise 

the professional and ethical standards of the tax preparation profession. We acknowledge it will 

take considerable time and effort to make sure all PTIN holders meet the requirements of the RPI 

by the December 31, 2013 deadline. In light of this, we strongly encourage the IRS to take 

additional steps to ensure they are able to hold fast to this deadline. 

In order to adhere to the deadline, the IRS and its vendor, Prometric, must work with the tax 

preparation community to ensure the more than 300,000 preparers required to take the 

competency examination are able to do so by the deadline. The IRS should develop a strategy to 

ensure Prometric is able to service each preparer. As many preparers live in mral, remote areas 

without a nearby testing center, it is critical this strategy include making mobile testing sites 

available. This strategy should not include extending the testing deadline. An extension of the 

deadline would delay the intended benefits of the RPI and be a disservice to taxpayers. 

Our Recommendation: The IRS and its testing vendor should develop strategies to ensure 

they have provided adequate access to testing facilities and sufficient testing capacity to 

meet the needs of the tax preparation community. 
43 

f 

Chairman BOUSTANY. Thank you, Ms. Pickering. 

We are now—the Committee is now going to recess for the commemoration of 9/11. I appreciate the panel’s patience with us. We 

will promptly reconvene at around—right about 11:30 at the conclusion of that commemoration and we will proceed from there. 

So we thank you. Committee stands in recess. 


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[Recess.] 

Chairman BOUSTANY. We would like to reconvene the hearing. 

I would ask the panelists to please take their seats. 

The Subcommittee thanks you all for your patience with this 

delay we have had and—but, anyway, we will continue onward. 

And Mr. Hodge, you are recognized for 5 minutes for your oral 

statement. 

STATEMENT OF SCOTT A. HODGE, PRESIDENT; THE TAX 

FOUNDATION 

Mr. HODGE. Thank you, Mr. Chairman and Mr. Lewis and 

Members of the Committee. I really do appreciate the opportunity 

to talk about this important topic. 

I am sure you all agree that the ideal tax system should do only 

one thing and that is raise a sufficient amount of revenues to fund 

the government activities with the least amount of harm to the 

economy, but by all accounts, the U.S. Tax Code is far from that 

ideal. Our current tax system is a byzantine monstrosity that 

spans 70,000 pages, costs taxpayers more than $160 billion a year 

to comply with, and now dictates virtually every aspect of our lives, 

and even before the ACA grafted more than 40 new provisions to 

the Tax Code, the relentless growth of credits and deductions over 

the past 20 years has made the IRS a super agency, engaged in 

policies as unrelated as delivering welfare benefits to subsidizing 

energy-efficient refrigerators. 

Although the IRS’s annual budget may be relatively small, it is 

essentially controlling vastly more budgetary resources than any 

cabinet level agency. The more than 170 different tax expenditure 

programs in the Tax Code have a total budgetary cost of over $1 

trillion and these myriad tax provisions were enacted to achieve all 

manner of social and economic objectives, but the most troubling 

development in recent years is that the expanded use of these tax 

credits to deliver social policy has knocked millions of people off the 

tax rolls and turned the IRS into an extension of the welfare state, 

a role that it has not managed very well, and today there are a 

record number of Americans, 56 million in all, 41 percent of all filers now pay no individual income taxes because of the generous 

credits and deductions, and worse yet, the IRS now gives out more 

than $100 billion in refundable credits to people who have no income tax liability. 

In 2010, the budgetary costs of both refundable and nonrefundable tax credits exceeded $224 billion, and to put this in perspective, if tax credits were combined into a single program, they would 

be the fourth largest domestic program behind Social Security, 

Medicare, and Medicaid, and the ACA’s generous tax credits and 

cost sharing programs will no doubt increase the number of nonpayers and increase the IRS’s role as a deliverer of social benefits 

and the IRS has a dismal record of managing these tax credit programs. So we should expect the ACA to lead to billions of dollars 

in fraud, abuse, and erroneous payments. 

The Treasury’s own IG for tax administration has testified here 

that refundable credits are a magnet for unscrupulous individuals 

who file erroneous claims for these credits and the IRS’ failure to 

rein in the sizable amount of fraud and improper payments in proVerDate Mar 15 2010 00:25 May 30, 2013 Jkt 080693 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80693.XXX GPO1 PsN: 80693

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45 

grams such as the EITC and the Hope Credit should give us great 

concern about the ability of the IRS to skillfully manage the ACA, 

and the IRS stumbled out of the gate in implementing some of the 

earliest and perhaps the simplest provisions of the ACA, such as 

the Small Business Healthcare Credit and the indoor tanning tax. 

Many businessowners said that the benefits of the Small Business Health Insurance Credit was not worth the effort and you 

can’t blame them considering that calculating the credit takes multiple steps and seven different worksheets, and the IRS also had 

difficulty simply identifying the number of businesses who are supposed to pay the tanning excise tax. 

In many areas, the ACA makes the IRS an extension of the Department of Health and Human Services. The Premium Assistance 

Credit is a case in point where HHS has the authority to make the 

rules while the IRS and Treasury are responsible for doing the paperwork, policing the system, cutting the checks, and fixing any 

problems that may arise. 

Now, imagine if the Supplemental Nutrition Assistance Program 

were run in the same fashion where eligibility for SNAP benefits 

was determined by USDA, but the IRS was responsible for 

verifying the incomes of recipients and either giving a food tax 

credit directly to taxpayers or sending checks to grocery stores on 

their behalf. Does anyone think that that would make for an efficient and user-friendly system? 

The added compliance costs of the ACA will fall disproportionately on small businesses and the poor. Already about 73 percent 

of those people claiming their income tax credit pay a professional 

preparer to complete their tax return and no doubt that number 

will arise because of the ACA. The irony is that many taxpayers, 

low-income taxpayers, will have to ask themselves how much they 

can afford to pay a professional tax preparer in order to claim a 

tax credit that is intended to pay for health insurance that they 

currently cannot afford. 

In conclusion, Mr. Chairman, it is hard to believe that anything 

can make the Tax Code look simple and understandable, but the 

Affordable Care Act does just that. The solution is not to give the 

IRS more money, resources or staff. The solution is to reform the 

Tax Code and eliminate the most burdensome and distortionary 

tax preferences and return the IRS to its core mission of simply collecting the necessary revenues to fund government programs. 

Thank you very much for this opportunity. I welcome any questions that you may have. 

[The prepared statement of Mr. Hodge follows:] 


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Introduction 

Written Testimony 

Of 

Scott A. Hodge 

President 

Tax Foundation 

Before the House Ways and Means Committee 

Subcommittee on Oversight 

On the IRS's Implementation ofthe Affordable Care Act 

September ll, 2012 

Mr. Chairman and members of the Committee, thank you t'or the opportunity to speak to you 

today on the challenges facing the IRS's implementation of the AtTordable Care Act (ACA). 

Founded in 1937, the Tax Foundation is the nation's oldest organization dedicaled to promoting 

economically sound lax policy at the federal, state. and locallcvcls or government. V·le arc a 

non-pmtisan 501(c )(3) organization. 

For 75 years, the Tax Foundation's research has been guided by the immutable principles of 

economically sound tax policy that were lirsl outlined by Adam Smith taxes should be neutral 

to economic decision making. they should be simple, transparcnt, stable, and thcy should 

promote economic gro\vth. 

In other words, the ideal tax system should do only one thing - raise a suftlcient amount of 

revenues to fund government activities with the least amount of harm to the economy. By all 

a"Cmillts, the U.S. tax code is far from that ideal. Our current tax system is a Byzantine 

monstrosity that spans 70,000 pages, costs taxpayers more than $160 billion per year to comply 

with, and now dictates viliually every aspect of our lives. 

Even bel()re the ACA grafted more than 40 new tax provisions to the tax code and eJJcctively 

paired the IRS with HHS to manage one-sixth of the nation's economy. the relentless growth of 

credits and deductions over the past 20 years has made the IRS a super-agency, engaged in 

policies as unre1ated as delivering welt are benefits to subsidizing the manufacture of energy 

efficient reti-igerators. 

Although the IRS', annual budget may be relatively small, it is essentially controlling vastly 

more budgetary resources than any Cabinet-level agency_ The more than 170 different tax 

expenditure programs in the tax code have a totai budgetary cost exceeding $1 trillion. Some 

$900 billion of those tax expenditures arc targeted to individuals, while another $100 billion arc 

intended to benefit businesses. 

These myriad tax provisions were enacted to achieve all manner of social and economic 

objectives, sllch as encollraging people to buy hybrid vehicles, tum com into gasoline, buy a 
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home, replace the home's windows, adopt children, put them in dayeare, then help them go to 

college, while saving tor your mV1l retirement, and the list goes on. 

Managing vast social programs is not a function the IRS is designed to pertonn, nor is it a 

function that the IRS peric)rms very well. But the ACA will not only expand the IRS's role in the 

welfare staLe, it will force more and more Americans it look to the IRS for their income and 

benefits. 

Irthc tax code wasn't complicated enough, the ACA will make it unmanageable while increasing 

the compliance costs of milli.ons of taxpayers. The result will be an increase in fraud, abuse, aud 

erroneous payments. 

Oddly, in many of its provisions, tbe ACA makes the IRS and extension of the Department of 

Health and Human Services. The bill gives HHS tl,e authority to make the rules while giving the 

IRS the responsibility tor doing the paperwork, policing the system, cutting the checks, and 

tixing any problems that arise. 

While the temptation is to give the IRS more money and resources to meet these tasks, the real 

solution is to overhaul the tax code and allow the fRS to retUlll to its core mission of collecting 

tax revenues. 

The ACA Gives the IRS Three Big Tasks 

The ACA gives the IRS three major roles to play in assuring universal health insurance.' first, 

the IRS is required to collect more than $800 billion in new tax revenue over the next ten years 

to fund the various components of the legislation. Second, the fRS is tasked with managing very 

generous refundable tax credits for individuals who cannot afford to purchase private health 

insurance as well as tax credits for small businesses that cannot afford to provide tlleir employees 

insurance. Lastly, the ACA puts the IRS in the role of en ItlfCer 10 extraet special taxes - or 

"penalties" ~ from individuals \\"ho lail to pun.:hase health insurance or from businesses that lail 

to provide "affordable" insurance. 

These arc anything but complementary missions. The IRS's own Inspector Gencrallully admits 

that "the ACA presents a major chailenge to the IRS as Ihe ACA represents Ihe largest set oflax 

law changes in more than 20 years and affects millions of taxpayers.'" 

In order to get a sense of how the IRS will manage these new tasks, it is fair to look at the results 

of current policies. 

Care Act; Planning Efforts for the Tax Provisions of the Patient Protection and Affordable Care Act 

Appear Adequate; However, the Resource Estimation Process Needs Improvement, Treasury Inspector General for 

Tax Administration, June 14, 2012, Reference Number: 2012-43-064, p. 1. 

2 
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The Growth in Nonpayers and the IRS's Role in the Welfare State 

One ofthe most troubling development in recent years is that the expanded use of the tax code to 

deliver social policy has knocked millions of taxpayer. off the tax rolls and turned the IRS into 

an extension oftlle \velfare state - a role it has not managed well. 

Today, a record number of Americans - 56 million, or 41 percent of all tilers - now pay no 

income taxes after taking advantage of the generous credits and deductions in the tax code, At 

least h311'0[the5e lilers look to the IRS as a source of income thanks to the more than $100 

billion in refundable tax credits paid out to people who have no income tax liability, As a result 

of removing millions of people olnhe tax rolls, we have dramatically reduced the number of 

people with "skin in the game" while increasing the amount ofredistTibution through the tax 

code, 

In 2010, the budgetary cost of both the non-refundable and refundable tax credits totaled 5224 

billion, Aller adjusting for inllation, this is ten-times their cost in 1990, To put today's costs in 

perspective. iftax credits \vcre combined into a single program, they VI/QuId now be the {-ollrthlargest domestic program behind Social Security, Medicare, and Medicaid. "'The hvo largest 

refundable credits, the EITC and the ACTC, receive a much larger appropriation than the IRS's 

own budget." 3 

The ACA's generous tax credits and cost-sharing payments - with an average value 01'$4,000' -

will no doubt increase the number of non payers while increasing the IRS's role as deliverer of 

social benefits, 'lne cost 0 r the Health Insurance Premium Tax Credit and exchange subsidies is 

now expected to total more than $800 billion during the ten years allcr it goes into effect in 2014, 

The IRS is Ill-Equipped to Manage Social Programs 

The IRS has a dismal record in managing the plethora of tax credit programs it is already 

responsible I()r, so we should expect the ACA to led to billions of do liars in fraud, abuse, and 

erroneous payments, For example, Treasury's IG for Tax Administration has testified here that 

"the unintended consequences of [refundable 1 credits is that they are ollen the targets of 

unscrupulous individuals who file erroneous claims for these credits,"; The fact that the value of 

the Premium Tax Credits cOltld approach $14,000 Jor a family of Jour, by some estimates', all 

but guarantees that the IRS will have to combat considerable fi'aud and abuse, 

3 "Improper Payments in the Administration of Refundable Tax Credits," Testimony of the Honorable J. Russell 

George, Treasury Inspector General for Tax Administration, Hearing Before the Committee on Ways and Means 

Subcommittee on Oversight, U.S. House of Representatives, May 2S, 2011, p. 2. 

~ Stephen Ohlemacher, "Can the IRS Manage to Police Both Taxes and Health Care Law?", Associated Press, July 19, 

2012. (mt?j!~~:!.~~;.~!~~.\'g.0.~.y'::;.g!:~)!.0)g.t:!~~.y./!!:!0.~!;~~r.!~.f~/!~.~!~.!t(1!Y~!?~)!?:.~n?:.~9.L9.~D.5:~~~.~9.~.\.~.~*!.~~.!:.f:~~.l\'.0:£~.f.~~.?!:~0_: 

Ibid. 

I> Stephanie Rennane and Eugene Steurle, Health Reform: A Two-Subsidy System, Tax Policy Center 510-0001, Table 

3, (2010). h.t~ p.:l1 I/o}':-v.vv ...t a)~ po.1 i;::yc~.(1 ~e( :pr g/o.u IT.~ exslc..o nJf: 1:1 t/Ppf-j'S.1 ().~ o.O.o~. _ PclJ 
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IG reports are replete with examples of how the IRS has failed to controltraud and erroneous 

payments in virtually all oflhe tax credit programs under its jurisdiction. Some recent examples 

include: 

Earned Income Tax Credit: The largest tiLX credit program leads to the most abuse. The 

IRS reports that "23 to 28 percent of EITC payments are issued improperly each year," 

which translates into "$11 to $13 billion in improper E1TC payments.,,7 Remarkably, 

reports the IG, "the IRS docs not require individuals to provide any supporting 

documentation to verify eligibility for claiming the EITe.'" The EITe has the second 

highest amount ofimpropcr payments after Medicaid. 9 

TheAdditionalChildTax Credit: The IG reports a substantial increase in the number 

of filers who are not authorized to work in the U.S., but use an Individual Taxpayer 

Identitlcation Number (!TIN) to improperly claim the credit. In 2010, the IRS paid S4.2 

billion in refUndable child credits to individuals who were not allthorized to work in the 

United States. "' 

PlugcinEIectricandAlternativeMotorVehicIeCredit: The IG "idelllified 12,920 

individuals who electronically med their tax returns and erroneously claimed $33 million 

in Plug-in and Altc111ative Motor Vehicle Credits" because "IRS processes did not ensure 

the plug-in electric and alternative motor vehicles met the requirements for vehicle year, 

placed-in-service date, and make and model."" 

Resi<!ellti"jJ:llergy()'c<!its: The IG reported that because the IRS did not require any 

third-paJiy documentation for the expenses related to home energy efficiency 

improvements, 362 prisoners or under-age tax filers erroneously claimed the Residential 

Energy Credits on their tax returns.J'2 

lI<>pe<::redit: The IG found that, "Some taxpayers are claiming the Hope Credit for more 

years than allowed by la\v." IJ The limit is 1\\'0 years but some \\'ere found to claim the 

credit for three and even four years. 1n one investigation, the 10 found that "the amounts 

of credits inappropriately claimed averaged close to S I ,400 and totaled just over 5232 

million.,,14 

7 Ibid., p. 3. 

: Ibid.} p. 4. 

:_http://w • .vw.trel .... ·y.gov/ .. gt.ais;.mia .. nca;/ •• emlan.nua._s"PU:UH):P"r. p.23. 

George, Inspector General, Memorandum Geithner, "Management and Performance 

Challenges Facing the Internal Revenue Service for Fiscal Year 2012," p. 12. 

11 "Energy Tax Policy and Tax Reform," Testimony of the Honorable J. Russell George, Treasury Inspector General 

for Tax Administration, Hearing Before the Committee on Ways and Means Subcommittees on Select Revenue 

Measures and Oversight, u.s. House of Representatives, September 22, 2011, p. 4. 

12 Ibid" p. 5. 

13 "Improvements and Needed in the Administration of Education Credits and Reporting Requirements for 

Educational Institutions/, Treasury Inspector General for T8X Administration, September 30,2009, Reference 

Number: 2009-30-141, p. 2. 

14 Ibid. 

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Despite the [G's recent report suggesting that the IRS's plans to implement the ACA appear 

"adequate," the vast number ofprohlems the IRS is already having administering its current 

portfolio oftax programs should give us great concern over its ability to skillfully manage the 

ACA. 

The IRS Has Stumbled Early in Administering tbe ACA 

The IRS stumbled out of the gate in implementing some of the earliest - and, perhaps simplestprovisions of the ACA: the Small Business Health Care Tax Credit; the Indoor Tanning Excise 

Tax; and, the Expansion of the Adoption Credit. 

The initial results hom the Small Business Health Care Tax Credit do not hade well Jilr 

lawmakers' broader goal of incentivizing businesses to provide affordable health insurance for 

their employees." Despite thelRS's S I million expense to 111ai14.4 million postcards to 

potentially eligible small business owners, only 309,000 had claimed the credit as of Octo her 

2011. These taxpayers claimed 5416 million in credits, a fraction of the $2 billion cost the 

Congressional Budget Office had estimated for that year. 16 

When the IRS surveyed business owners to lInd out why they did not take advantage ofthe 

program, many responded that the benetit was not \vorth the effort This is not surprising 

considering that "there are multiple steps to calculate the Credit, and seven worksheets must be 

completed in association \vith claiming the credit:,17 If this small provision is any indication of 

the added compliance burden that the ACA will place on businesses, it is rair to say that the total 

compliance costs for the entire act will be staggering. 

The fRS's experience vi/lth implementing the Tanning Excise Tax -the most joked about tax in 

the bill - should also give us pause. As the IG has reported, the number of businesses who first 

paid the tax was much lower than expected, in part because there were no good figures on how 

many businesses actually pro\.'jde tanning services. The Indoor Tanning Association estimated 

that there were roughly 25,000 such businesses, but the actual number who tiled excise tax 

returns last year averaged around 10,300. 18 

Lastly, the ACA increased the valuc ofthc Adoption Credit to $13,170 trom $12,150 and made it 

refundable. 19 As it has wilh the other tax credit programs, the IRS has struggled to prevent 

erroneous payments. In the first quarter of 2011, the IG identified 736 taxpayers who had 

received more than $4 million in improper Adoption Credits. 

While these may seem like a trivial issues, there are provisions within the ACA that likely will 

cause Lhe IRS similar problems. For example, it is tair to wonder if small biotech flnns will lind 

the administrative cost of claiming the tax credits available through the Qualified Discovery 

10, TIGTA, Ref. No. 2011-40-103, Affordable Care Act: Efforts to Implement the Small Business Health Care Tax Credit 

~ere Mostly Successful, but Some Improvements Are Needed (September 2011). 

17 Ib~d. p. 6. 

IbId. p. 2. 

18TIGTA Semiannual Report to Congress, April 1, 20ll-September 30, 2011, p. 29. 

19 IRS Management Challenges Memorandum, p. 9. 
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Project Program worth the dl()rt. On the other hand, if the IRS could not determine how many 

tanning businesses were required La charge the Tanning Excise Tax, how- can it successfully 

implement the Medical Device Excise Tax'! This will require the IRS to coordinate its efforts 

with the FDA, which has classitled some 1,700 generic classes ofmedic"l devices. 

The IRS as an Extension of HHS 

In key areas. the ACA gives HHS responsibility to determine eligibility and set the program's 

rules but gives the rRS the responsibility of verifying eligibility based on tax returns and a 

staggering amounts of data from employers and inslll'ance companies. Then, the IRS is also 

responsible for delivering benefits and fixing any problems that arise. At best, this is a recipe for 

bureaucratic turfhattles. At worst, it is a quagmire for both the lRS and taxpayers. 

The Premium Assistance Credit is a case in point. The credit amowlt is determined by the 

Secretary of HHS, but it is up to the IRS to verify household income based on tax return data for 

past years. Recipients can either chose to have Treasury make direct payments to the insurance 

plan in which they are enrolled or they can chose to pay the premiums themselves and apply to 

the IRS for the credit at the end of the tax year. 

However. if HHS and the exchanges miscalculate someone's credit amount, it is up to the IRS to 

fix the overpayment or underpayment on a taxpayer's 1040. The overpayment will be treated as a 

tax while an underpayment will be treated as a reduction in tax. Either way, taxpayers will be 

caught between any communications disputes between the IRS and HHS. 

Imagine if the Food Stamp system were nm in the same fashion, where the eligibility for Food 

Stamps was dete11l1ined by USDA but the IRS was responsible lor verifying the incomes or 

recipients and either giving "'food" tax credits directly to taxpayers or sending checks to grocery 

stores on their behalf. Does anyone think that this would make for an efficient and user-friendly 

system" 

Compliance Costs will Skyrocket Under ACA 

The ACA is a full employment act tor the tax preparation industry and will add billions of 

dollars in compliance costs to people who Calmot afford health insurance. As it stallds, 

complying \vith the current tax code costs taxpayers an estimate S163 billion each year according 

to the National Taxpayer Advocate. 

About 80 percent of all taxpayers use professional tax return preparers and commercial software 

to complete and tile their tax returns, and that fIgure is slIrely to rise as the result oCthe ACA. 

While some may think that this will make compliance easier. the hurden ol'these costs fall 

disproportionately on small businesses20 and the poor. For example, about 73 percent of those 

6 
52 

f 

Chairman BOUSTANY. Thank you, Mr. Hodge. 

Mr. Perretta, you may proceed with 5 minutes. 

STATEMENT OF SETH PERRETTA, PARTNER; CROWELL & 

MORING, LLP 

Mr. PERRETTA. Thank you, Mr. Chairman and Members of the 

Subcommittee. I am Seth Perretta, a partner at Crowell and 

Moring, where I lead the firm’s employee benefits practice. I am 

here today on behalf of the American Benefits Council for whom I 

serve as outside health tax counsel. 


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53 

The Council’s Members are principally major national employers, 

as well as health insurers and employee benefit advisors. Collectively, the Council’s Members either sponsor directly or provide 

services to health and retirement plans covering more than 100 

million Americans. 

I would like to briefly address three points today. The first concerns the job that the Treasury Department and the IRS have done 

in helping employers and others comply with the Affordable Care 

Act, the second is to refer to a few examples of how the agencies 

have resolved the challenges faced by employer sponsors of health 

plans, and the third is to mention some of the important decisions 

yet to be made. 

First, whether one believes the Affordable Care Act represents 

good policy or bad policy, everyone ought to agree on two points. 

Namely, the Act is a large and complex statute involving many 

new responsibilities for employers and other stakeholders, and 

given that reality, the Treasury Department and IRS have overall 

done a very commendable job helping employers and others understand and comply with the law’s requirements. 

As referenced in my written testimony, the Council and the employer community as a whole have not always agreed with the interpretations that the agencies have made regarding certain provisions of the Act. For example, the agencies’ interpretation of what 

constitutes a grandfathered plan is an example, but it has been our 

experience that the agencies have generally sought to give employers flexibility in implementing the law and I can say without reservation that the agencies have been very accessible during this 

process to us, not only welcoming input from us, but also actively 

seeking out our views on how to make the law more 

administratable. 

Since March of 2010, the American Benefits Council has hosted 

14 webinars for our members on different aspects of the Affordable 

Care Act. Collectively, thousands of employee benefits professionals 

nationwide have participated. IRS or Treasury officials have directly presented at a great many of these programs and have been 

a very valuable technical resource for all of them. 

In the same vein, I just completed my term as chairman of the 

Employee Benefits Committee of the DC Bar where we hosted 

seven programs ourselves related to the ACA for the benefit of 

legal practitioners across the city. Again, the agencies’ officials actively participated in these programs upon request. 

These sessions and other formal and informal communications 

have allowed the regulators to answer numerous questions from 

employers as well as benefit practitioners. Of equal importance, the 

agencies have used these opportunities to better understand the design and operation of employer sponsored health plans so they 

could address the true diversity of plan offerings that exist and develop rules regarding implementation. 

Second, time does not permit a lengthy discussion of specific regulatory projects, but my written testimony addresses some in greater detail, and of course I will be pleased to answer any questions 

you may have about them. 

The first concerns the requirement for employers to include the 

value of employer healthcare on an employee’s form W-2 starting 


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for the 2011 tax year. Employers had many questions and concerns 

about this new requirement, including whether particular coverage 

was to be included on the form, and if so, how do actually value 

that coverage. In answering these questions, the IRS incorporated 

many employer suggestions and in fact gave employers a much 

needed one-year reprieve in complying with the new requirement. 

Another example concern to the law is the so called pay-or-play 

provision and the challenge of defining what constitutes full-time 

employment and whether coverage is deemed affordable. This is 

relevant both from employer penalties as well as for purposes of 

the premium tax credit. The IRS has crafted safe harbors that will 

make these determinations simpler for plan sponsors. 

A third example relates to the way in which IRS allows employers to treat multiple plan offerings for purposes of determining 

their financial obligation to pay one of the new fees prescribed by 

the law. I believe one of you mentioned the medical device tax. 

Well, this is—there is another fee called the PCORI fee and the 

IRS issues favorable guidance from the employer perspective that 

makes it easier to comply. 

Again, with respect to all three examples, it goes without saying 

that many companies may not like the underlying requirements, 

but IRS action has made compliance with these provisions more 

straightforward and flexible to accommodate a variety of plan 

structures. 

The third and final point I want to emphasize concerns the future. In the coming months, employers will need clear and easy to 

follow guidance in order to fulfill a number of reporting and disclosure obligations, including just 6 months from now a March 2013 

notice related to state insurance exchanges. The IRS also needs to 

more fully explain how employers are to determine whether the 

plans they offer provide minimum value for purposes of the Act’s 

pay-or-play provision. And likewise, employers who sponsor 

wellness programs to improve the health of their employees and 

control healthcare costs need to know how wellness incentives will 

be taken into account for determining whether an employer-sponsored plan is deemed affordable. 

With respect to these and other regulatory projects yet to be developed, we urge the IRS to continue to be receptive to input from 

employers in the same fashion that it has sought to do so from day 

one of the Act. 

Thank you for allowing me to testify this morning. I would be 

pleased to answer any questions. 

[The prepared statement of Mr. Perretta follows:] 


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TESTIMONY OF 

SETH T. PERRETTA 

PARTNER, 

CROWELL & MORING LLP 

ON BEHALF OF THE 

AMERICAN BENEFITS COUNCIL 

BEFORE THE 

COMMITTEE ON WAYS AND MEANS 

SUBCOMMlTTEE ON OVERSIGHT 

UNITEn STATES HOUSE OF RKPRESENTATIVES 

HEARING ON 

THE INTERNAL REVENUE SERVICE'S IMPLEMENTATION ANn 

AnMINISTRA TION OF THE 

PATIENT PROTECTION ANn AFFORDABLE CARE ACT 

SEPTEMBER II, 2012 
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Chainmm Boustany, Ranking .Member Lewis, and Members ofthc Subcommittee, thank you for the 

opportunity to share our views \vith you today regarding the implementatjon and administration of 

the Patient Protection and Affordable Care Act (thc '''ACA'') by the Internal RCv'enue Service (the 

"IRS"). My name is Seth T. Perrelta, and.1 am here today reprcsC'Uting the American Benetlts 

COllncil (the "Council"). The Council is a public policy organizalion representi-ng plan sponsorsprincipally Fortune 500 companies - und other organizations that assist employers of all sizes in 

providing benefits to employees. Collcclively, the Council's members either sponsor directly or 

provide services to retirement and health plans that cm'er more than 100 million Americans. 

In my role as outside health tax counsel to the Council, I have been assisting the organization and its 

members in understanding hmv to comply \\.rith the many provisions of the ACA that have or vvill 

soon become elTective. Additionally, as a patineI' at Crov.rell & Moring LLP here in Washington, 

DC, J work regularly \vith both employer and health insllrance company clients in helping them 

understand their obligations with respect to the ACA. Since March 2010, my practice has been 

focllsed in very large pm1: on the ACA and I have spent thousands Or hours assisting my clients in 

complying v.ith the ACA and have worked closely with the federal agencies, including the IRS, as 

part of my work. 

As this testimony describes in greater detail, it is the Council's view that the UtS has \vorked 

diligently to adopt a thoughtful and generally collaborati y'c implementation process. ill addition to 

the opportunities for the employer community to provide input via the fbr111ul regulatory process, 

through the submission of extensivc comment letters and meetings with the agencies. Treasury and 

IRS officials have made themselves available to help the employer community understand its 

compliance responsibilities through a number of informal means. For example, since the enactment 

of the ACA, the Council has hosted fourteen compliance webinars to datc reaching, collcctively~ 

thousands of corporate employee benefits professionals nationwide. Treasury and IRS officials 

have participated directly in f(mr ofthem and have been an available technical resource for the rest. 
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I \vould a!so note that t recently completed my tenure as Chainnan ofthe Employee Benefits 

Committee of the Tax Section of the District of Columbia Bar Association. In that capacity, V,ie 

hosted seven ACA compliance ",,'ebinars for !egal practitioners. Likewise, the agency officials 

either directly participated or provided valuable input to our educalion elIorts. Nolably. IRS and 

Treasury ofli.cia1.s have not only been available to ansvver numerous questions, but have themselves 

used these webinars and other opportunities to learn moTe about employer and health plan 

compliance challenges as they have developed regulatory guidance. 

Implementation Challenges ojthe ACA 

The ACA is a very signiricant picce oflegislation for employer plan sponsors. TI1c Im·v includes 

dozens of provisions that affect employers, and employers, in turn, take their compliance 

obligations very serious!y. These include new requirements on employer plans to provide specific 

substantive benefits such as first dollar coverage for preventive care services, expanded eligibility 

for coverage for children up to age 26, broader claims and appeals rights, new requirements to value 

and report the aggregate cost of cCliain employer-provided coverage on an employee's Form W-2, 

and nc,v responsibilities for employers with an average of at least 50 employees to offer coverage to 

full-time employees and to meet new affon11bility and minimum value standards for the health 

coverage they offer. Additionally, the law imposes many nc\v notice and disclosure requirements 

on employers~ including a requirement that is effective just six months from nm\' in March 2013 

that requires employers to notify employees of the availability of health insurance through state 

insurance exchanges beginning in 20.14. Additionally, unlike some statutes which contain a single 

effective date for their substantive provisions and \vhich provide substantial lead time to a!low the 

regulating agencies and the regulated public to prepare for those provisions, the ACA contains a 

range of effective dates, from as soon as six months after enactment of the ACA through 2018. 

As a result, employers have had to work quickly and continuously since the ACA's enactment to 

comply y.,rith its provisions. In the same vein, the IRS has had to work diligently on a ncar-constant 

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basis to provide timely guidance on a range of issues. The implementation challenges, for 

employers and the IRS alike. have been very substantial. 

IRS Implementation and Admini.'!tration EjJorts 

From the beginning of this process and continuing to the present, the IRS has \vorked hard to 

establish a deliberative implementation process that allo\\:s for comment and participation by 

stakeholders, including the employer commuility. Naturally, employers and health plans have not 

always agreed with the guidance issued by the IRS, For exampk, cmployers \v~rc particularly 

disappointed that the regulatory agencies took an overly narrow interpretalion of what constitutes a 

"grandfathered" plan that permits employers to avoid the need to comply with several ACA 

requirements. But, overall, the Council commends the agencyls regulatory process and its efforts to 

provide flexibility to plan sponsors in implementing the lmv. 

The IRS I,as not followed one specific method for promulgating AC A-related guidance. lnstead, 

the IRS has adopted different approaches to providing guidance and conducting rulemaking over the 

past tv..ro-and-a-halfyears based, in part, on the effective dates prescribed by the law. 

In the first six months follmving enactment of the ACA, the IRS, along \,\ ... ith the U.S. Department of 

Labor CDOL") and U.S. Department of Health and Human Services ('"HilS"), relied to a great 

extent on the usc of interim final rules in providing guidance. This is in (;ontrast to issuing proposed 

rules, which typically allO\v for more meaningful notice and comment by stakeholders. The IRS's 

usc of interim final rules~ however, \vaS due in large part to the fact that many o[thc ACA's market 

reforms had an initial effective date of just six months following enactment. The Council and its 

members found this process frustrating at times as the resulting guidance was sometimes unclear or 

resulted in unnecessary administrative burdens. Nonetheless, the IRS was regularly available to the 

Council and its members to address employer concerns and worked diligently with tlle Council to 

address many pressing implementation issues facing employers. On several occasions, the IRS 

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provided additional clarifying guidance following the issuance of an interim final ruk in response to 

concerns expressed by the Council and its members. 

As we have moved f1ll1her from the initial effective date of the ACA, the IRS has generally adopted 

a more measured approach to mlemaking that relies more heavily on proposed rulemaking rather 

than interim final rules. Additionally, before proceeding v,rith the issuance of proposed or final 

rules, the IRS often issues a notice as the initial step of its rulemaking process to first ask 

stakeholders for input on discrete issues or concerns related to a specific guidance project or to set 

forth in writing for public comment a concept or frame\NOrk under consideration by the agency. 

The IRS then f()llows up this notice by issuing proposed regulations that again provide for notice 

and public comment. The IRS has also generally been willing to address concerns of broad 

applicability quickly through the issuance of various forms of sub-regulatory guidance, such as 

answers (0 Frequently Asked Questions ("FAQs"). Notices and the like. 

The use of sub-regulatory guidance can in some respects be a mixed blessing. It facilitates thc 

isswmce of important guidance in a timely fashion, but may not allow for mcaningflll public 

comment. Significantly, unlike in the months that initially follm\t'cd enactmeni ofthe ACA, \'\'/here 

the usc of sub-regulatory 6'1lidance by the agcncies \vas fairly common, the rH.S appcars to be using 

sub-regulatory guidance at this time more to frame issues for future rulemaking or to clarify morc 

formal guidance that has already becn the subject of significant public comment. 

Specific Example", of I RS Implementatioll Efforts 

1. lv'ew F'orm W-2 Reporting Requirements/c)r Employer-Sponsored Group Health Coverage: 

Under the ACA, employers are required to report the cosi of certain employer-provided health 

coverage on the ~onn W-2. This requires employers to make complex determinations of whether 

pmilcular coverage is subject to reporting and hmv to value the coverage if it is. This neVil reporting 

requirement was scheduled to become eHective for the 2011 tax year, meaning that many employers 

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\\/ould have becn required to make substantial changes to their payroll and accOLmting processes 

with very liltle lead time. Fortunately, aner receiving feedback trom the Council and the employer 

community generally about the ncar-impossible task this would entail, the IRS, in Notice 2010-69 

(issued on October 12, 2(10), provided employers with a one-year reprieve by making the new 

requirement optional for 2011, 

Subsequently, on March 29,2011, the IRS .issued Notice 201 1-28, \-"hieh provided interim guidance 

to employers on this ne'\\.' repOliing requirement. The Notice provided that, unless and until the IRS 

issues further guidance, employers filing fewer than 250 Fonns W-2 for the preceding calendar year 

are not subject to the reporting requirement. The Notice also invited additional comments, and, -in 

response to the comments it received, the IRS, on January 3, 2012, issued Notice 2012-9, which 

amended and restaled the interim guidance provided in the earlier Nutice. In addition, the IRS 

stated in Notice 2012-9 that it would continue to consider additional comments as it works toward 

-issuing additional guidance, including regulations. Employer plan sponsors are currently \vorking 

to implement this requirement in time for issuing Forms ':ttl -2 for tax year 2012, which generally are 

issued to employees in January 2013. 

As should be apparent by this point, employers as well as various other stakeholders voiced their 

concerns regarding the implementation of this new reporting requirement, and the IRS listened. 

The series of Notices on this topic not only incorporated many employer suggestions and responded 

to numerous employer concerns, but also provided employers with additional time to better 

lU1derstand hO\v the nev.r rule works and to update their administrative systems and practices to 

facilitate eventual compliance with the rule. Although certain questions remain to be ans\vered, as a 

result of the IRS outreach 1O the employer community on this issue, employers are in a much better 

position to comply with this reporting requirement. 

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2. The ACA 's Pay-or-Play Provision: Under the ACA, beglnnlng in 2014, !arge employers are 

required to oiTer their employees the opportunity to enro!l in group health plan coverage that 

provides '"minimum essemial coverage," lhat is both affordab!e and provides "'minimum value." If 

a large employer does not offer "minimum essential (;overagc," or if such coverage is eiiher 

unaffordable or docs not provide minimum value, the employer \v111 be subject to a significant 

excise tax. This has come to be known as the ACA's "Pay-or-Play" provision, with large 

employers choosing bcl\veen the "Pay" option (i.e., do not provide slLch COVl'1"age and pay the 

excise tax) or the "Play" option (i.e., provide the requisite coverage and avoid the excise tax). 

As noted, employers subject to the ACA's Pay-or-Play provision are onl.Y required to provide 

qualifying and affordable coverage to Cull-time employees. I·lence, employers have been keenly 

interested and invcsted in a rationa!, coherent administrative scheme for determining which 

employees will be considered to be "full-lime employees" for this purpose. The IRS responded by 

issuing a series of Notices that are intended 10 provide employers ,"vith helpful rules for purposes of 

oeteDnining ,\'ho is a full-time employee. 

First, the IRS issued Notice 2011-36 on May 3, 2011. This Notice described and requested 

comments on a potential optional safe harbor (the "look-back/stability period safe harbor") to 

dctcnninc whcther cxisting (versus nc\v) employees afC full-time employees [or purposes orPay-orPlay. Under this safe harbor approach, an employer will be permittcd to detennine each employee's 

full-timc status by tlrst choosing a "look-back" period ofthrec to twelve months. The employer can 

then determine during this ;"Iook-back" period whether the employee averaged at least 30 hours of 

service pCI' week or 130 hours per month. lfthe emplo)'ec averages the necessary hours during this 

"!ook-back" period, the employee '"liill be treated as a ful!-time emp!oyee during the subsequent 

"stability~' period, regardless of the employcc)s actua! number of hours vvorkcd. 

This guidance generally was well-received by employers because the safe harbor \vould help 

eliminate administrative burdens associated ,vith complying ,vith Pay-or-Play on a monthly basis 

(3 
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\"lith respect to a variable hour employee who could v.. .. ork full-time hours one month but perhaps not 

the next month. Additionally, employers appreciate the t-lexibility that would be provided in 

determining the length of any look-back and stability periods. Such tlexibility \\.'i1l ensure thal 

employers can adopllook-back and stability periods that best refiecllhe unique realities of their 

employee population and business. 

On September 13,2011, thelRS issued Notice 2011-73, which provided additional relief!or 

employers with regard to the Pay-or-Play provision. Specifically, this Notice described a sare 

harbor under \vhich employers could rely on the employee's Form W-2 wages, instead ofhoLisehold 

income, to deicrmine \vhother the coverage they oiler is "affordable.'· Under this safe harbor, no 

excise tax would apply if the required group health plan contribution by the employee was no more 

than 9.5% orthe employee's Form W-2 wages. This guidance \vas also generally \\-'ell-received by 

our members. The statute provides that "a[[ordability" is based on an individual's modified 

adjusted gross household income. However, since employers generally do not have knovvledge of 

an employee's sources of income beyond the Form W-2 wages paid by the employer to the 

employee (in part because of privacy concerns). employers need a way to measure ,vhether the 

coverage provided to an employee is affordable in order to detcnnine whether they could be subject 

to an excise tax under the Pay-or-Play provision for failing to provide affordable coverage, The 

contemplated mle is helpful because it will allow employers to determine affordability based solely 

on an empJoyee~s form Tl/Il_2 'vages. 

The lRS has since issued several additional notices that have been intended to both clarify prior 

guidance set forth in the earlier notices as ,veIl as make certain modifications based on comments 

received by the fRS to date. The consistent theme in this series of Notices is the TRS' willingness to 

solicit feedback from employers and other stakeholders, and to continue to move tmvard a more 

flexible and predictable regulatory scheme for employers. 
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3. Feesfhr the Patient-Centered Outcomes Research Trust Fund: The ACA created several ney·/ 

sections of the Internal Revenue Code to impose a fee (the -'PCORI Fcc") on health insurance plans 

\Io/ith respect to "'specified health insurance policies" and on employers with respect to "applicable 

self-insured health plans" to partially fund new comparative ehnieal effectiveness research relating 

to patient-centered outcomes through the Patient-Centered Outcomes Research Trust FUlld. The 

peORI fcc is a per capita fee based on the average number of lives covered under a policy (for 

insured coverage) or plan (for self-funded plans), 

The PCORI Fcc, which applies for plan or polic)! years ending after September 30,2012 but on or 

before September 30,2019, raises the cust to employers of providing group health coverage and, as 

such, is an issue of great importance to employers. Hence, the Council believes the IRS took the 

correct step when it began the implementation process for the PCORI Fee by releasing, on June X, 

2011, Notice 2011-35, which requested comments on how the lees imposed by these new 

provisions of the lmcmal Revenue Code should be calculated and paid, including possible rules and 

safe harbors, The IRS followed this up, on Aprill7, 2012, by issuing proposed regulations 

pertaining to the PCORI Fee under which, among other things, employers may treat multiple seJfinsured arrangements as a single applicable "plan;' so long as thcse arrangemcnts are established 

and maintained by the same plan sponsor and have the same plan year. Because many employers 

already treat multiple arrangements as a single "plan'! for business or accounting purposes, this 

approach ,vould allow employers to continue \\'ith current business practices ,"vithout fear of 

incurring additional liability under the PCORI Fee, In this case, again, the IRS addressed an 

employer concern in providing additional guidance. 

Additional Guidance Needed 

The ACA is, of course, a large and complex law, and much of the implementation and 

administration responsibilities arc still on the horizon. Thus, just as the lRS has gencrally been vcry 

8 
64 


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receptive to employer input so far, the agency must continue to understand that ensuring employer 

nexibility is essential to successful implementation of the lavv. 

Among the areas the Council sees an urgent need for additional guidance are: 

Reponing and Disclosure Ob1igalions: The ACA \vill impose additional reporting and 

disclosure obligations on employers, including disclosures to employees, as well as various 

agencies including the IRS. Of special concern to employcrs is a requirement, effective for 

March 2013, that employers provide a notice to employees regarding the availab-ility of 

inslirance coverage through the state exchanges. Employers urgently need guidance 

regarding their new reporting and disclosure obligations, including this TvTarch 2013 notice 

requirement. 

Afinimum Value: As noted above, an employer must pay cCliain excise taxes under the Payor-Play provision i1'it fails lO provide coverage that provides "minimum value." Although 

the IRS has issued some recent guidance setting forth a conceptual [ramevvork [or 

detennining "minimum value" (and requesting comments \'\'ith respect to sllch guidance), 

many questions remain regarding hmv "minimum value" will be determined. Many 

employers are unable to plan Jor the future - specifically plan years beginning in 2014-

without further clarifying guidance regarding minillllllll value. 

Wellness Programs: Employers continue to utilize \vellness programs to improve the health 

of their employees and to control the rising cost of providing employer-sponsored health 

coverage. Under rules put in place in the mid-to-Iate 1990s, employers have been able to 

triTer inecntives of up to 20% of the total premium cost to encourage employees to participate 

in well ness programs. The ACA efTcctively coditied this guidance by allovloring for an 

inerease to 30%). Employers are concerned that any guidance issued to implement t1le 

inc-rease not impose ne\v bmdens on employers. Additionally, employers need clarifieation 

that such incentives \vil1 be taken into aecount in determining whether an individual's 

9 
65 

f 

Chairman BOUSTANY. Thank you, Mr. Perretta. We will begin 

questioning. 

Our tax laws provide financial and behavioral incentives to actors across our entire economy, some intended, others not. 

Mr. Goldberg, in your experience both as a government official in 

multiple capacities and a tax practitioner, I think you probably 

have a deeper understanding than most of us about how that all 

plays out. Can you describe in greater detail some of the unintended consequences the new law might provide? 


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For example, might it provide incentives for employers to dump 

low-income employees into an insurance exchange or shift workers 

to part-time employment? 

On the individual’s side, does it incentive healthy individuals to 

forgo buying health insurance until they are sick or injured? 

Could you comment on some of the unintended consequences that 

might ensure? 

Mr. GOLDBERG. Sure, Mr. Chairman. 

My experience tells me that the American people are extraordinarily responsive to incentives created by the Tax Code. They are 

aided in this process by a massive infrastructure of advisors. For 

the most part, I think this is healthy. This is part of who we are. 

The way the Affordable Care Act is currently structured, I believe that employers will have significant incentives to discontinue 

group coverage and split their savings with employees. I believe 

that is going to happen. I believe that the current tax penalty 

structure for failure to purchase insurance on an exchange clearly 

provides a young, healthy individual to not purchase the policy 

until he or she is in need of insurance. So this is going to happen 

and it is going to happen for sure. 

You can change it. You have decades of collective experience in 

structuring incentives. If you structure the incentives properly, you 

will change the behavior. 

Chairman BOUSTANY. Others want to comment on this, on unintended consequences? 

Mr. HODGE. Yes, Mr. Chairman. 

If you are looking to reduce the cost of healthcare, this is not the 

way to do it, and for instance, two taxes in particular, one is the 

medical device tax, which the ultimate payer of that tax will be insurance companies of the first order, ultimately consumers, but 

that will cascade down to consumers eventually. In addition to 

that, there is the fee that is being placed on insurance companies. 

That will also cascade down to the payers, the companies, businesses, and individuals. 

Chairman BOUSTANY. In higher premiums then? 

Mr. HODGE. In higher premiums. So these will actually jack up 

the cost of premiums in insurance. So if the intended goal is to reduce that, this is going to have a contrary effect. 

Chairman BOUSTANY. Thank you. 

Others want to comment on this? 

Mr. Hodge, you made a comment in your statement and it is also 

in your written statement about the tax credits that we have 

thrown throughout our entire Tax Code and the sheer complexity 

of this and you made a statement and I want to make sure I have 

this correct. It constitutes the—it would constitute the fourth largest social welfare program. 

Mr. HODGE. That’s correct, Mr. Chairman. 

If you add up to the total cost in both the refundable and nonrefundable costs of all of the tax credits that are currently administered, it would be the fourth largest domestic program in the budget. They currently total $224 billion and that would make them 

fourth only to Social Security, Medicare, and Medicaid. 

Chairman BOUSTANY. And so now we are going in a direction— 

with ACA we are going in a direction of more complexity in the Tax 


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Code rather than the stated goals of trying to get to a simplified 

Tax Code with lower rates? 

Mr. HODGE. Well, we have certainly turned the IRS now into 

a full-blown governmental agency managing vast numbers of programs in a way that it was simply not intended to do. 

Chairman BOUSTANY. Thank you. 

And I would like to hear from the panel on how the new responsibilities from the healthcare law might affect the tax gap. I think 

when I read through testimony, this was raised, and Mr. Goldberg, 

I know you mentioned a threat of an increased tax gap in your 

written testimony. Could you expand on that? 

Mr. GOLDBERG. Yes, Mr. Chairman. 

Again, I have a simple story. This is a tax. Treat it like a tax. 

The current penalties for noncompliance, and I am talking principally about on the credit side, there is no interest, there are no 

penalties. The IRS is not going to engage in its customary enforcement efforts. This is an ugly story. It is not happy, but it is true, 

and if you give—if you simply let the IRS do its job the way it does 

elsewhere, you will mitigate significantly these compliance problems. 

It is not a perfect marriage, but it has been around a long time 

and despite what others say, I believe the IRS and taxpayers pretty 

much have worked it out pretty well and if you are going to go 

down this road, let taxpayers do their job, let the IRS do its job, 

and I believe it will significantly minimize noncompliance, but as 

currently structured, it is going to be a mess. 

Chairman BOUSTANY. So we will see a widening of the tax gap? 

Mr. GOLDBERG. Yes, sir. 

Chairman BOUSTANY. And the revenue generated from these 

taxes in ACA are basically a significant part of the funding of the 

new program, the coverage expansion; is that correct? 

So we are going to see a widening tax gap, but also significant 

underfunding of the proposed program; is that a fair statement? 

Mr. GOLDBERG. I believe it is, Mr. Chairman. I think your 

Committee historically has done an admirable job bipartisan supporting adequate funding for the IRS. They are charged with immense responsibility and they should be funded properly to discharge it. 

Chairman BOUSTANY. Thank you. 

Others want to comment on the tax gap issue? No. 

Thank you. That’s all I have. 

Mr. Lewis? 

Mr. LEWIS. Thank you, Mr. Chairman. 

I want to thank each one of you for being here today, taking the 

time and being so patient. 

Mr. Perretta has reached out to the IRS on issues related to 

health reform, to the health reform law, and what have been your 

experience in term of the IRS responding? 

Mr. PERRETTA. I speak with folks at the IRS and Treasury on 

issues both on behalf of the American Benefits Council and on behalf of my issuer and employer clients on a very frequent basis. I 

would say I speak with them probably on a biweekly or certainly 

once a month on issues of emerging importance in terms of figuring 


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out how to comply with these rules and I can say that the response 

has always been fantastic. 

The IRS and Treasury, I really think, in many respects as a Federal agency are a model for making themselves available to help 

comply with their rules. They always make themselves available to 

provide both explanations on an informal basis to individual practitioners, but also to larger groups. 

As I mentioned, as chairman of the DC Bar Employee Benefits 

Committee, we hosted several programs and several—seven or 

eight programs since 2010 on the ACA and you call around town 

and you try to get people from the agencies to come speak to practitioners who are trying to understand these rules and help employers understand these rules, and I can say without a doubt, the IRS 

and Treasury have always been the most responsive of the agencies 

I have dealt with in making available people to help have those 

conversations. 

Mr. LEWIS. What type of help/assistance do employers need 

from the IRS that hasn’t been issued yet? 

Mr. PERRETTA. There are sort of, I think, three really, really 

big issues. One is minimum value in order to determine whether 

or not an employer is providing coverage that will qualify as minimum essential coverage under the pay-or-play, so essentially how 

an employer decides whether or not they are complying with the 

obligation to provide qualifying coverage. The coverage must provide minimum value, and right now, we have a proposed sort of 

concept as to how minimum value will be determined, which we 

are very thankful for and very happy with, but I think further contours on that rule would be helpful so employers can understand 

their obligation. 

Wellness incentives, employers are using wellness programs to a 

greater extent to help both reduce the healthcare trends and also 

to make sure their employees are healthy and wellness incentives 

were codified—sorry, were addressed in regulation by HIPAA almost 20 years ago and it was codified by Congress in the ACA, and 

employers just want to make sure that as we move forward with 

wellness programs, that they are supported as a way for employers 

to continue to encourage their employees to become healthier. 

I think those would be two of the more significant. 

Mr. LEWIS. Thank you very much. 

Mr. Hodge, I am somewhat curious and maybe I just want to 

know. You seem to be saying by the IRS helping to carry out the 

mandate of the Affordable Care Act, that it is helping to expand 

the welfare state and I want to be sure that we are reading from 

the same page. 

Could you just tell me what is the welfare state? 

Mr. HODGE. I would include all of the means-tested type safety 

net programs in addition to all—many entitlement programs that 

are generally administered through HHS and so forth, and the IRS 

has now become an integral part of many of those welfare type programs, broadly stated, and so, yes, it is an integral part of the welfare state in providing basic assistance to people through things 

like the Earned Income Tax Credit and other sorts of refundable 

credits. 

Mr. LEWIS. And do you think that is a good thing or—— 


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Mr. HODGE. I think it is a very bad thing actually. I do not 

think it is a role for the IRS to play in that. I think for the IRS 

to be handing out now over $100 billion worth of refundable credits 

is a very bad trend. 

Mr. LEWIS. Well, who should play that role? What agency of the 

government should play that role? It is a necessary role for someone to play. Who should play that role? 

Mr. HODGE. Well, it is already being played in other areas of 

the government. For instance, HHS is providing that role through 

its assistance programs and now we have it duplicated through the 

Tax Code and I think that we ought to have agencies that specialize in it keep to their core missions. 

Mr. LEWIS. Would other Members of the panel like to respond? 

Mr. Goldberg. 

Mr. GOLDBERG. Mr. Lewis, I—my first presidential appointment was from Ronald Reagan. My second presidential appointment and third were from the first President George Bush. Each 

of those presidents supported increases in the Earned Income Tax 

Credit. The intellectual birth of the Earned Income Tax Credit is 

Milton Friedman. 

The IRS is the most efficient delivery of these kinds of incentives 

in the world. It doesn’t regulate. It doesn’t dictate behavior. It simply administers a pricing system. One would think that conservatives are particularly enamored, as am I, of pricing systems. The 

code is about our values. It is about homeownership. It is about 

education. It is about thrift. It is about education. It is about 

health. And abstract notions to get rid of all of that, I believe, are 

stillborn. 

So I think the IRS is doing a terrific job. It is a job that was 

charged with by each of my bosses, President Reagan and President Bush, and I think they do it very well. 

Thank you very much. 

Mr. LEWIS. Thank you, Mr. Goldberg. 

Madam Chair, I yield back. 

Mrs. BLACK. Thank you, Mr. Lewis. 

And now, Ms. Jenkins, you are recognized for 5 minutes. 

Ms. JENKINS. Thank you, Madam Chair. Thank you all for 

being here. 

Ms. Pickering, in your testimony you noted that the vastly different missions of the Department of Health and Human Services 

and the Internal Revenue Service has the potential to create taxpayer confusion and unexpected debt, tax debts, as a result of overpayments of subsidies. For example, according to HHS regs, a taxpayer does not have to file a tax return to substantiate their income level; however, the IRS will require a tax return to reconcile 

the advanced premium tax credit. 

Can you just elaborate on the consequences of having two different standards and what recommendations would you have to ensure that taxpayers do not receive an unpleasant surprise because 

they improperly estimated their income? 

Ms. PICKERING. Thanks for that question. 

We certainly, on the frontline as we are serving our clients, see 

from a very real and practical experience the challenges that individuals have in navigating the complex tax laws. What we are parVerDate Mar 15 2010 00:25 May 30, 2013 Jkt 080693 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80693.XXX GPO1 PsN: 80693

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ticularly concerned about with regards to, you know, the HHS having much looser documentation requirements for establishing income and eligibility, the HHS in their mission is motivated and 

incented to help everyone gain health coverage and the IRS is 

incented to collect taxes and reconcile that premium, and so for 

that, we are afraid that with different standards and different confusing information, and certainly as this is a new regulation being 

rolled out, we will see that there are many taxpayers that have not 

recently or ever been required to file their taxes will now have to 

enter into the tax system to file their taxes to reconcile that premium and that is going to cause some frustration, some surprises, 

and put people into a situation where they have a tax liability 

through no fault of their own, certainly not through, you know, bad 

intentions. They just didn’t understand the regulations, estimated 

things incorrectly, and now find themselves owing money. 

Ms. JENKINS. Okay. Thank you. That helps. 

From my understanding, current law requires that if a taxpayer’s 

circumstances change during the year, whether it is due to good 

news, like a new job or a raise, or because they lost their job, the 

taxpayer’s responsible for updating their information with the exchange, potentially resulting in a large overpayment or underpayment if not timely reported. The taxpayer advocate has warned 

taxpayers who do not update their household information during 

the year may find that they owe a significant amount of money at 

the end of the year, money they likely do not have. 

Maybe, Mr. Goldberg, each of you could comment and describe 

how this requirement to provide notice and the IRS reconciliation 

process works from this perspective of just everyday taxpayers. 

Mr. GOLDBERG. Sure, Ms. Jenkins. 

Let me comment very briefly on your prior question. 

Ms. JENKINS. Sure. 

Mr. GOLDBERG. I believe that the issue of forcing people to file 

tax returns may be less than is generally estimated. Because of the 

way the Affordable Care Act is structured, I believe virtually all 

of—a very, very large percentage of those folks will receive health 

coverage through Medicaid rather than on the exchanges. There 

will be some exceptions and it is going to be a problem. 

Stepping back, I think that we have decided to run this through 

the exchanges. I believe, frankly, that was a political decision because people didn’t want to call it a tax. That creates a wholly unnecessary intermediary dealing with all of the information you are 

talking about. They don’t know how to do it. Mrs. Black, as you alluded to, it raises serious confidentiality and privacy—and it is just 

not necessary. The H&R Blocks of the world, the advisors of the 

world, the churches, the nonexempt or tax-exempt organizations, 

the IRS, I believe will do a credible job of educating employees and 

purchasers on the exchanges generally how the rules work. 

If you simply let the family go in and say, ‘‘Gee, I got a raise, 

I want to change my premium,’’ which families are perfectly capable of doing, it will work fine. If you say, ‘‘You have to fill out three 

forms and talk with four different government employees, getting 

passed from phone to phone before you can make the change,’’ they 

are just not going to do it. 


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So my recommendation is you trust the individuals and families 

to make that decision working with advisors, working with providers, and you will significantly reduce that problem and I believe 

the IRS, properly instructed by this Committee, will be reasonable 

in dealing with the transition, but as it is structured, it is just a 

bureaucratic mess. 

Ms. JENKINS. Okay. Fair enough. 

Madam Chair, I yield back. 

Mrs. BLACK. Thank you, Ms. Jenkins. 

And Mr. Becerra, you are recognized for 5 minutes. 

Mr. BECERRA. Thank you, Madam Chair, and thank you all for 

your testimony. By the way, thanks for being patient with us as 

we went out to commemorate 9/11. 

You know, I would agree with anyone who is willing to say that 

any time you do something big, especially in a big place like America, it is going to take a little time to adjust. 

And, Mr. Goldberg, can I just say to you thank you for your constructive comments. We could be critical or critique, but at the 

same time, what we are hoping to do is have a functional government, and I appreciate where you point out where IRS can do better and where it is doing the best it can and I agree with you. 

There aren’t too many governments in the world that can say they 

have as efficient a system as we do. We still have to figure out how 

we collect on that tax gap that we got, but I got to believe that men 

and women who work in the IRS, who oftentimes get a lot of heartburn for what they do, are trying to do the best job they can, especially the folks that are out there trying to do the enforcement, you 

know, trying to find the folks who are trying to evade paying their 

fair share of taxes. 

So I am going to be the last one that is going to sound like 

Scrooge and say that as we try to expand healthcare to 33 million 

Americans who had a heck of a time trying to afford it, that we 

should try to go backward because the reality is it is not just about 

trying to help 33 million Americans and their families to get health 

insurance, quality, affordable health insurance for the first time. 

Actually, a lot more is at stake. There are over 100 million Americans who, beginning 2014, will never have to worry about a preexisting condition again. They all have the security of knowing that 

they are going to keep their insurance, and as we try to administer 

this program, whether through the IRS or HHS, who cares, we are 

trying to do something to help folks. 

At the end of the day, as Mr. Goldberg, I think you said, it is 

trying to make sure that government works for people, whether it 

is the IRS or any other agency, and my sense is that if we all work 

together, we can make this happen. 

Mr. Hodge, I am concerned when I hear people say that the IRS 

is taking on way too many things. It should go back to its—I think 

you said something to the effect of it should go back to its core responsibilities. I don’t disagree with that except that the IRS helps 

people save money. Should the IRS stop providing assistance 

through these provisions that help people save money by encouraging them to do so and getting a tax break by doing so? Should 

the IRS not do that? 


ccoleman on DSK8P6SHH1PROD with HEARING
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Mr. HODGE. There are certain elements of the Tax Code that 

should be in place. We should not be taxing savings. So I don’t consider that a ‘‘tax break.’’ It should—— 

Mr. BECERRA. But we do tax it. We do tax benefits/gains that 

are made, people’s income, and what we do is we give people a 

chance to not have all their income taxed if they save some of it. 

So should we not provide folks with that type of a tax credit or 

a tax deduction through the code? 

Mr. HODGE. We have gone way beyond that into—— 

Mr. BECERRA. No, I know we have. I agree with that, but—— 

Mr. HODGE.—now giving credits for replacing the windows of 

their home and buying an electric car and putting their kids in 

daycare and so forth, and so—— 

Mr. BECERRA. Right. So should we return to, as you say, the 

core mission of simply collecting the necessary amount of tax revenues the government? 

Mr. HODGE. That is right. 

Mr. BECERRA. Okay. So then we shouldn’t provide—encourage 

people, through a tax credit or a tax deduction, encourage them to 

save more money? We shouldn’t encourage them through the homeowner’s mortgage interest deduction, an incentive to purchase a 

home. We shouldn’t provide them with a tax credit to save money 

to prepare to send their kids to college. 

Those are not core missions of the IRS, and from what I gather 

from your testimony, we are simply pure and have the IRS collect 

the revenues that the government needs. There are a whole bunch 

of Americans who would have a tougher time buying a home, saving for their kids’ college education or even saving for their own retirement, and I understand what you are saying. The further away 

you get from your core responsibility, the more chance that there 

is mischief or a mistake, but I got to believe that only Scrooge 

would say don’t try to package that present for that little child on 

Christmas Day. 

There are things that we try to do to make life better. Don’t always get them right, but, as I think Mr. Goldberg was just saying, 

if we try to focus on doing it right, then there is a good chance that 

we are going to be helping a lot of Americans and in a bill that 

has become law, historic legislation, that now will extend protections against discrimination on preexisting condition in healthcare 

to 150 million Americans or so, to extend coverage to 33 million 

American families now. I hope that what we do is just work together, figure out how we can help the IRS make sure it doesn’t 

make mistakes and does it right so that when Christmas comes, 

everyone gets what they deserve. 

With that, Madam Chair, I will yield back the balance of my 

time. 

Mrs. BLACK. Thank you, Mr. Becerra. 

And Mr. Marchant, you are recognized for 5 minutes. 

Mr. MARCHANT. Thank you, Madam Chair. 

When I held my town hall meetings this last break, Bedford, 

Texas comes to mind, the crowds pretty consistently stood and delivered one message. Please simplify the Tax Code. Please make it 

to where the IRS does not have as much involvement in our lives. 

Pretty simple message from my constituents. 


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When I got the briefing paper for this hearing today, which was 

a very good briefing paper, I was taken aback by the exact opposite. When the Affordable Healthcare Act comes into effect, the IRS 

is going to be even more involved in our lives. The IRS is going to 

be a bigger part of everybody’s tax return, and in fact, in my opinion, people that have been doing their own taxes may now have to 

consult with someone and pay someone to help, and in my mind, 

we are going exactly the opposite direction. 

Yes, 33 million people theoretically will become—have access to 

healthcare, but 300 million people are possibly impacted by the 

process that we have put in place to bring about that change. 

Mr. Hodge, Deputy Commissioner Miller suggested that the process of taxpayers updating government officials about the details, 

the intimate details, of their personal and family lives had really 

nothing to do with the IRS. It was just going to be a simple calculation, a simple you fill out your return and based on what you put 

on the return, that was going to be the extent of the IRS’s involvement. Do you have anything to say about that? 

Mr. HODGE. Well, it looks very clear, as I understand the legislation, and especially from what Mr. Goldberg and Ms. Pickering 

has said, the IRS will be immediately and very—and intimately involved in that, and if I read the briefing from the Joint Committee 

on Taxation summary of the ACA, it says very clearly that any adjustment to tax resulting from the difference between the advanced 

premium assistance and the allowable refundable tax credit would 

be assessed as an additional tax or a reduction in tax on the tax 

return. In many aspects, this will be like the Alternative Minimum 

Tax where it is sort of an accidental thing that people fall into 

when they actually fill out their tax return. It is very difficult for 

them to adjust their withholding in such a manner as to anticipate 

this situation. So they are going to be caught in this bureaucratic 

quagmire between HHS and the exchanges, which could make a 

mistake, and their own changes and their own situation, and then 

the IRS that has to rectify these. 

It is—I feel sorry for folks that are going to get caught up in this 

and they will end up on April 15th realizing a tax burden that they 

may not have seen coming and that is pretty frightening. 

Mr. MARCHANT. Mr. Goldberg, do you see—you made the comment earlier that business and individuals are very responsive to 

the Tax Code and they will sit down, they will figure it out. Do you 

see the opportunities for additional tax avoidance in the way these 

forms are filled out or do you see people’s behavior being altered? 

Do you see them sitting down with their accountant saying, ‘‘Okay, 

we may have filed this way before, but because of the new rules, 

we are going to decide to file this way?’’ And, in fact, the Alternative Minimum Tax is an excellent example from my district because that’s the number one thing in the Tax Code that catches my 

constituents. 

Will it alter the behavior of taxpayers? 

Mr. GOLDBERG. Yes, sir, I believe that it is a certainty. For example, if you have a young kid off on his or her own who is 

healthy, someone, I guarantee you, will tell her, ‘‘You can either 

pay $400 to the IRS or you can pay $3,000 to the exchange or you 

can wait and when you get sick, you can buy an insurance policy 


ccoleman on DSK8P6SHH1PROD with HEARING
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because there is no preexisting conditions. So you can save 2,600 

bucks a year till you get sick.’’ That is going to happen for sure. 

So, yes, of course, and I think that is just human nature. That 

is—I mean you see nothing but human nature if you are running 

the IRS, better and worse. 

The important point I think that Congress needs to keep in mind 

is if you say you want to maintain private markets for health insurance and if you say I want to subsidize the cost of insurance for 

those who have difficulty paying, you have just said I want some 

form of phased-out credit. That is what you have just said, otherwise you can give everybody $25,000 and tell everybody to go buy 

insurance and tax it at the back end. That would actually work, 

but otherwise, you are stuck with this question. 

I personally think the structure of the Ryan proposal, setting 

aside the numbers, in many ways is a terrific structure. It was first 

supported by President Clinton, but it has the same question. How 

are you going to get progressive, subsidized subsidies from the government to buy health insurance? See, you got the same question 

any way you go. You got the same issues, and I believe the choice 

is very simple. For all of its problems, you either let the IRS administer those kinds of progressive credits or you get somebody else 

to do it, and I think it is a more prudent choice to let the IRS do 

it, but you can’t avoid the choice. You go to single-payer, you avoid 

the choice, but otherwise, I think you are stuck with it. 

You are absolutely right about the behavior. The Tax Code today 

is grotesque. It is repulsive. It is so unneedlessly complex (sic). In 

terms of issues, your colleague across the capitol, Senator Coburn, 

is a profile in courage for calling out some of the needless subsidies 

provided by the Tax Code. You guys could do a terrific job to strip 

it down. Healthcare, progressive subsidies, phased-out credit, you 

are stuck where you are, whether it is Congressman Ryan or 

whether it is the Affordable Care Act. That’s what I—— 

Mrs. BLACK. And thank you, Mr. Goldberg. The time is expired. 

Thank you, Mr. Marchant. 

And I think, barring anyone else walking in the door, it looks 

like we are at the end, and I just want to go back to a question 

that I asked to the previous panel, Mr. Miller, related to the 

amount of information that is going to be in so many different 

places having to do with the taxpayer’s personal information so 

much more than we have ever known before and that is a real concern for me. 

I mean obviously right now the IRS does share some of this data 

with Child Support, some with Medicaid, and maybe some other 

cases of revenue collection, but now we are going to see it much 

broader. We are going to see it where the exchange employees with 

vast amounts of information that they haven’t previously been 

privy to, and I want to know from your perspective, each of you, 

if you have the same concern that I have, especially given the fact, 

as I said in the previous panel, that what we have seen in this 

Committee, as we have had the IRS hearings, that we know that 

there is fraud out there. There are people who have gotten refunds 

that didn’t belong to them, and are—do you have a concern about 

where we are going with this? 


ccoleman on DSK8P6SHH1PROD with HEARING
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Mr. Goldberg, I want to start out with you and if we can just go 

down the panel, that would be great. 

Mr. GOLDBERG. Yes, I share the concern. It is one of the greatest concerns about the Affordable Care Act. The easiest solution is 

to take the exchanges out of that business. 

Mrs. BLACK. Thank you. 

Ms. PICKERING. Yes, I share that concern as well. We know 

that the IRS works very hard to protect taxpayer information. In 

working with HHS and the exchanges now, there is going to be a 

broader exchange of information, and while I believe everyone 

works to the—you know, to the best of their ability with the best 

intentions, there is just so much more opportunity and the 

fraudsters and the criminals are getting so much more clever in 

their ability to propagate these fraud schemes. So I think there is 

exposure and vulnerability. 

Mrs. BLACK. Thank you. 

Mr. Hodge. 

Mr. HODGE. Yeah, I too share that and I am sure every taxpayer fears their information getting out. They do so when they fill 

out a credit card application, a health plan. Everything is now accessible to these hackers and I would think everyone would worry 

that the more you disseminate this kind of information, personal 

information, the more vulnerable it is to that kind of mischief. 

Mr. PERRETTA. Thank you. I certainly support the comments of 

my fellow panelists here. 

I can’t help but say a couple things from the perspective of the 

Council, which is employers are obviously very focused on employee 

privacy and, you know, one of the issues that employers were concerned about was the issue of having to figure out whether their 

health coverage was affordable because that is relevant to figuring 

out whether the employer has to pay a penalty, and most employers don’t know what their employees’ household income is and most 

employees don’t want to tell their employers what the household 

income is, and thankfully the IRS listened to the Council and the 

employer community and they came up with the Safe Harbor Rule, 

which lets employers base affordability on the employee’s W-2 

wage, which is something that the employer will know, and so it 

does go a little bit to your point, Chairwoman, about the issue of 

privacy. 

Another issue I do want to touch on while I have your attention 

is the issue of notice and disclosure and this goes a little bit to the 

issue of flowing of information from parties, and I think employers, 

both small and large, are obviously concerned about the burdens 

that are going to fall upon them in terms of having to transmit, collect, store information as part of their obligations under the ACA 

and I think as the IRS moves forward, they have been very 

thoughtful in reaching out to us to understand sort of what our 

concerns are, but that is obviously an area where working closely 

with the employer community would be helpful since the employers 

will bear a significant piece of that burden in making sure that information flows in the right way. 

Mrs. BLACK. Thank you. 

Ms. Pickering, I have one additional question, one final question 

for you, and this goes back to the comment that you made both 


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here and also in your written testimony about the concerns as preparers and getting your—the folks that work for you educated on 

what they are going to have to be doing as far as the rules go and 

I would like for you just to expound a little bit about how if we 

don’t get those final rules in a timely manner, how this is really 

going to affect those who will be preparing those taxes for folks/the 

clients that you will be seeing? 

Ms. PICKERING. We have got a number of factors going on 

there. The Registered Tax Return Preparer Initiative is a very important initiative for getting all professional tax preparers registered with the IRS and up to—you know, up to standard competency levels. This is something that we have always supported. 

We think it is important for the professionalism of the industry, 

and in there, there is a continuing education requirement as well 

which says that preparers need to stay current on tax law. 

Now, as the ACA is rolling out as well, our clients will be coming 

to us looking forward to some additional understanding at least a 

minimum what are the tax implications to them with regards to 

the healthcare implementation and it is very important to have 

timely regulations so that all of that can be incorporated into the 

training plans and getting people prepared. 

So the timing of these things is critical and it is, you know, certainly a daunting task, but one that we look forward to partnering 

with the IRS on. 

Mrs. BLACK. Well, thank you. 

Mr. PERRETTA. Could I just add a follow-up comment? 

Mrs. BLACK. Yes. 

Mr. PERRETTA. Just to the idea that—going on that point, employers are often pricing their health insurance coverage 12 to 14 

months in advance. 

Mrs. BLACK. That is right. 

Mr. PERRETTA. And so when you think about having coverage 

in effect for 2014, many employers are beginning to fashion that 

coverage and make decisions about what that is going to look like, 

what their subsidies are going to be, and obviously playing on that 

point about the timely information, really the sooner the regulations can come out, obviously with opportunity for notice and comment, the better. 

Mrs. BLACK. Absolutely, and I know I am also hearing this from 

the insurance industry as well. Everybody’s waiting for those final 

rules and regulations, almost that they need them yesterday in 

order to be able to give advice to their clients or those that are buying the product. 

Once again, I want to say thank you to the panel for your patience today and thank you for all of the good information that you 

provided to us. 

This hearing is completed. 

[Whereupon, at 12:20 p.m., the Subcommittee was adjourned.] 

[Submissions for the Record follow:] 

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Timothy Stoltzfus Jost 


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House Committee on Ways and Means 

The Internal Revenue Service's Implementation and Administration of 

the Democrat's Health Care Law 

Testimony of Timothy Stoltzfus Jost 

Professor, \Vashington and Lee University School of Law 

Submitted for myself and not for any organization 

1370 Lincolnshire Drive 

Harrisonburg, Va, 28802 

5405642524 

jostt@~wlu.edu 
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House Committee on \Vays and Means 

The Internal Revenue Service's Implementation and Administration of 

the Democrat's Health Care Law 

Testimony of Timothy Stoltzfus Jost 

III a little more than a year, millions of uninsured Americans will begin enrolling in 

health insurance plans through the American Health Benefits Exchanges, These 

Americans-your constituenls-\vill be able to flUychasc health insurance because of lhe 

availability of premium tax credits. At this point, it appears that many states are choosing 

not to create their own exchanges in 2014, but rather to have their citizens purchase 

health insurance through federally facilitated exchanges. It is essential that these 

uninsured Americans be able to receive premium tax credits through these federal 

exchanges. My testimony addresses the provisions of the Affordable Care Act that will 

make it possible for this to happen, 

My name is Timothy Stoltzfus Jost and I am a law professor at Washington and Lee 

University. 1 am also a consumer representative to the National Association of lnsurance 

Commissioners and an elected member of the Institute ofMcdicllle. T have V\Tittcn 

extensively about the Aft()rdablc Care Act, and bing regularly about Aft(lrdahle Care Act 

implementation at www.healtilaffairs,orgfblog. 

My remarks today address assenions by Michael Cannon of the C A TO institute that the 

Department of the Treasury's rule providing for the federal exchange to issue tax credits 

is not authorized by the Affordable Care Act. This assertion has been widely publicized 

and seems to be causing confusion among state la\vmakers. Mr, Cannon's position, 

howevcr. is based on a misunderstanding of the law, its structure, and history, as I will 

explain, 

The Affordable Care Act Exchanges and Premium Tax Credits 

To understand this issue it is necessary to understand the role of the exchange in the 

Affordable Care Act. D,e American Health Benefits Exchange is fundamentally a 

market in which health insurance is bought and sold. The exchange is also responsible 

for ensuring that insurers who sell their products through the exchange meet certain 

minimwn standards to ensure that individuals and small employers who purchase in the 

exchcmgc are getting value for their dollar. Finally, the exchange is the gateway to 

federal premium tax credits, Medicaid, and other assistance programs for those unable to 

afford health insurance. The exchange concept has until very recently enjoyed broad 

bipartisan support as a tool for making private sector health insurance widely available 

and affordable lo Americans. Indeed, Congressm::Ul_ and Vice President nominee Paul 

Ryan's Roadmap for America includes health insurance exchanges. 

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Section l311 of the A1Tordabie Care Act asks the states to establish American Health 

Benefits Exchanges. The federal government calIDot order a state to operate a federal 

regulatory program, so section 1321 ofthc ACA authorizes the Secretary of Health and 

Human Services to establish a federally facilitated exchange in states that choose not to 

establish their mvll exchange. 

Mr. Cannon takes the position that federal exchanges cannot oiler premium tax credits. 

He bases this opinion on two subsections of section 36B of the Internal Revenue Code 

(created by section 1401 of the ACA), which provides for tax credits to help middleincome Americans afford health insurance. In defining the premium tax credit amount 

and the coverage months lor which it is available, sections 36B(b)(2) and 36B(c)(2)(A) 

refer to persons "enrolled in [a qualilied health plan] through an Exchange established by 

the State under section 1311." Mr. Cannon argues that this language precludes premium 

tax credits being issued through the exchanges operated in the states by the federal 

government. If this is tme, it is likely that many-perhaps most--Americans will be 

denied access to an important middle-class tax benefit in 2014, as it now appears that 

many states wilJ, at least initially, have federally lacilitated exchanges. 

In a recent alt-icle~ Mr. Cannon, together with Professor Jonathan Adler of Case Western 

University, claims that this language is not only unambiguous but also intentional, that 

Congress intended to punish states that rc1hsed to establish ex.ehanges hy re1hsing 

premium tax. credits to their residents.' Cannon and Adler {hrther claim thallinal rules 

promulgated by the IRS making premium tax credits available through federal as well as 

state exchanges are unauthorized by law ~ and thus illegal. 

If this claim is true, uninsured constituents of members of this committee stand to lose 

billions of dollars in federal tax rcliefthat would have assisted them in purchasing health 

insurance. 

The Affordable Care Act Explicitly Authorizes Federal Exchanges to Provide 

Premium Tax Credits 

Fortunately for your constituents, Mr. Cannon's claims are simply not true. If the sections 

that he cites were the only relevant sections of the Affordable Care Act, and if the 

legislative history and structure of the ACA could be simply ignored, his statutory 

constmction claim would be plausible. But the availability of tax credits through 

federally facilitated exchanges is recognized through the language of the ACA itself. 

Moreover, the legislative history of the ACA also establishes that Congress understood 

that premium tax credits would be available through both l'edcral and state exchanges. 

The IRS is explicitly authorized by Congress to interpret the statute and its interpretation 

of the law ,,,ill be given deference by the courts. TIle existence of exchanges in every 

state was assumed both by the Congressional Budget Office and by both proponents and 

opponents of the ACA as it was being debated. Finally, the structure and purpose of the 

ACA requires that stale or federal exchanges offer premium tax credils in every state. 
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I begin with the language of the ACA itself. The tenn "'exchange" is a defined tenn 

under the ACA, a point lhat Mr. Cannon does nol menlion in his article bUlthat would 

surciy be paid great attention by the courts. Section 1563(b) of the ACA statcs: "The 

term 'Exchange' means an American Health Benetit Exchange established under section 

1311 of the Patient Protection and Affordable Care Act." Section 1311 literally requires 

that the states "shall" establish an American Health Benefits Exchange by January I, 

2014. Because the Constitution prohibits the ledcral government from literally requiring 

states to establish exchanges, however, section 1321 (c), provides thaI "the [HHS] 

Secretary shall (directly or through agreement with a not-for-profit entity) establish and 

operate such r;,xchangc within the State." Under the ACA's definition ofexch::mge, the 

term "Exchange" in section 1321 means a section 1311 exchange. This is reinforced by 

section 1321 itse1t~ in which the ternl "such Exchange," reters to the "required exchange" 

mentioned in section 1321 (c)(1 )(B)(i), which is to say the 1311 exchange. When section 

1321 directs HHS to establish an "Exchange." therefore, it means to establish a section 

1311 exchange, which section36B authorizes to provide premillll1 tax credits. Moreover, 

section 1311 (d)( I) de tines an exchange as an exchange established by the state, therefore 

by delinition a seclion 1321 federally facilitated exchange is an exchange established by 

a stale under section 131 1. 

Section 36B is not the only section of the ACA that imposes duties on the state and 

federal exchanges relevant to premium lax credits. Section 131 I (d)(4)(G) requires 

exchanges to provide tb.-:ir enrollees with premium calculators that inc.1udc a deduction 

for premium tax credits. Section 1311 (d)(4)(I), requires exchanges to forward to the IRS 

information about enrollees who are eligible for premium subsidies. Section 

131 I (d)(4)(J), requires an exchange to notify employers if their employees are receiving 

premium lax credils. Finally, section 1413 requires slate and federal exchanges to use 

streamlined applications and eligibility assessments to help people quality for "health 

subsidy programs," which programs specifically include premium tax credits, see section 

1413(e)(1). All of these sections apply to federal as well as state exchanges. 

Most importantly, a third subsection of section 36B itself clarifies that premium tax 

credits are available tlll'Ough both state and federal exchanges. The ACA is composed of 

the Senate version of the Patient Protection and Al10rdable Care Act. Public Law 111-

148. and the Health Care and Education Reconciliation Act, Public Law 111-152. The 

Senate adopted the hill that became Public Law 111-148 in December of2009, but the 

House adopted it only in March of2010. Shortly thereafter, the House and Senate 

adopted HCERA, tlu'ough which the House made certain changes in the Senate bill. As a 

later-adopted statute, IlCERA takes precedence over that of the PPACA. ifthere is a 

contradiction. Moreover. since the adoplion ofHCERA was necessary to secure House 

adoption of the Senate bill. it is doubly important that the provisions of HCERA be taken 

seriously. The House bill contained only a federal exchange. Section 1004 of HCERA 

adds to IRC section 368, subsection 36B(J)(3) which requires both 1311 and 1321 

exchanges 10 provide certain information regarding premium tax credits to the fRS and 

to taxpayers. Cannon and Adler admit lhe existence orthis provision but simply say it is 

meaningless, as 1321 exchanges cannot authorize premium tax credits. This position. 

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ho\vcver, violates another canon of statutory construction ····that every provision of a 

congressional enactment should be given effect. 

It should be noted that several other sections ofthe ACA use the language on which Mr. 

Cannon relies--"an Exchange established by the State under section 1311." One ofthem 

is section 2001, which prohibits states from reducing Medicaid eligibility until an 

exchange "Established by the State under section 1311" is operational." If Mr. Cannon's 

interpretation oftbe ACA is corrcct~ states thal decide notto establish a state exchange 

wi 11 be barred indetinitely from cbanging their Medicaid eligibi I ity requirements. But 

this is not what the law means. 

The AtTordable Care Act's Legislative History also establishes that Federal 

Exchanges can offer Premium Tax Credits 

Mr. Cannon's interpretation of the ACA is also refuted by the legislative histOlY of the 

ACA. The Senate bill which became the ACA was derived from the S I 679,' the Senate 

Health, EdueaLion, Labor and Pensions Committee bill and S 17963 which emerged later 

from the Senate Finance Committee. Each ofthese bills included state and federal 

exchanges, vvhich \-vere called Gateways in the HELP bill. 

The HELP hill (scclion 142, adding section 3104 of the Public Health Services Act) 

created an elaborate structure under whicb states could either establish exchanges 

themselves ("establishing states"), request the federal government to establish an 

exchange in the states C"partieipaling states''), or fail to do either, in which case four 

years after the enactment of the statue the federal government would create a fallback 

exchange in the state. Premium tax credits were available in establishing and 

panicipat.ing states, but would only be available througb the federal tailback exchanges in 

states that complied with the employer responsibility provisions for state and local 

employees. In other \vords~ the states were threatened with loss of premium tax credits, 

not for failing to establish exchanges but for not complying with the employer 

responsibi lity provisions for their employees. 

The Finance Committec bill did not use this elaborate struetore. In tact, the rules it 

creates are very similar to the tinal ACA. It creates section 2235 of the Social Security 

Act, which provides that states "shall" establish an exchange, and sets oul the duties of 

the exchange. Section 222S(b) provides, in language very similar to cWTenl ACA section 

132l, that HilS shall contract with a nongovernmental entity to operate an exchange in 

states that fail to "establish and operate" an exchange in states that rail to create onc 

within 24 months. The Finance Committee Report4 rclers to these federally established 

exchanges as "state exchanges." in a number of places, including the precursor of the 

current premium tax credit provision, the bill refers to exchanges "established by the 

state," but nowhere does it provide, as did the HELP hil I, that premium tax credits would 

not be availabJe in the any of the exchanges created by Lhe federal government. 
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The provisions of the cUlTem ACA addressing this issue are taken largely from the 

Finance Committee hill, which makes sense because the Finance Committee has 

jurisdiction nver tax matters. The punitive provisions nflhc HELP bill were abandoned. 

The Senate debated the ACA extensively during Novemher and December 2009. 111e 

version of the Act they were considering included both state and federal Exchanges. 

Throughout the debate, Senators aswmed that tax credits would be avai lablc in all 50 

states. Thus Senator Bingaman stated on December 4,2009, that the ACA "includes 

creation of a new health insurance exchange in each State which will provide Amcric<ll1s 

a centralized source of meaningful private insurance as "'leU as refundable premium tax 

credits to ensure that coverage is affordable.'" Senator Johnson stated on December 17, 

"tbe legislation will also form healtb insurance exchanges in every State," which "ill 

"provide tax credits to significantly reduce the cost of purchasing that [insurance] 

coverage,.,6 

If Congress had meant to limit premium subsidies to state-established exchanges, as an 

incentive to States, one would have expected the Finance Committee report 011 S, 1796 

to have mentioned this, and for at least one Senator to have pointed this out during the 

debate in November and December 2009. 

Most importantly, the Congressional Budget Office (together with the Joint Committee 

on Taxation) provided Congress on November 30,2009, with an analysis oflhe impact 

of the legislation on premiums tbat assumed that premium tax credits would be available 

in all states, making no distinction between federal and state exchanges? Over the next 

te\\' days this analysis \vas discussed by Republican Senators Grassley,8 Enzi,tJ and 

Cobum. lo None raised what Cannon and Adler see as an obvious point----thalthe CBO 

analysis was flawed because it failed to recognize tl1at premium tax credits would not be 

available though federally facilitated (sec. 1321) exchanges. ]n fact, the CBO repeatedly 

provided cost estimates oftbe ACA and HCERA in late 2009 and early 2010, but never 

suggested that premium tax credits might be reduced if states failed to establish 

exchanges, In their most recent report from two weeks ago updating ACA coverage 

estimates in the wake of the Supreme COUlt decision, the CllO and JCT reiterates again 

that premium tax credits will be available though stale, federal, and partnership 

exchanges. II As Yale Professor Abbe Gluck notes in a recent blogpost12 (and 

forthcoming article), Senators often don't listen to each other, but they all listen to the 

CBO, which assumed that premium tax credits would be available to all Americans in all 

states. 

Mr. Cannon claims, hOWeV(;f, to have found a smoking gun. a colloquy between Senators 

Baucus and Ensign during the Finance Committee debate on the bill~ in which, they 

claim, Senator Baucus admits that premium tax credits could not be made available 

through federal exchanges. In fact, the colloquy had nothing to do with federally 

facilitaled exchanges, but rather \lvith vl/hether the Finance Committee or the Judiciary 

Committee had jurisdiction over malpractice reform legislation that Ensign wanted to 

attach to the bill. In fact, there is nothing in the legislative history of the ACA tbat 

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supports the notion that premium tax credits will not be available through federal 

exchanges. 

Mr. Cannon argues that Congress prohibited the federal exchanges trom offering 

premium tax credits as a ,vay of encouraging the states to adopt exchanges. It is in fact 

clear that Congress favored state exchanges, and offered generous grants to the states .. _ ..

which to dale have totaled nearly $850 million dollars with more on the way.u States 

that fail to establish exchanges vvill also lose some control of their insurance markets, 

Bm Congress did not try to "coerce" states to create state exchanges by threatening their 

citizens with loss of billions of dollars of premium tax credits, Indeed, under the 

Supreme Court's recent Medicaid decision, such coercion might have been suspect. 

The Structure ofthe Affordable Care Act Makes it Clear that Federal Exchanges 

may offer Premium Tax Credits 

Moreover. not only do a number of provisions oflhe ACA, alrcady described, refer 

explicitly to federal and state exchanges pcrfonning functions relating to premium tax 

credits, but the entire structure of the ACA's insurance reforms are based on the 

availability of premium tax credits in all states, The ACA's guaranteed issue and 

community rating requirements apply to insurers in all states. regardless of\vhcthcr they 

have federal or state exchanges, So do the ACA's risk mitigation programs. So docs the 

ACA's indi,idual mandate. The premium tax credits are intended to bring millions of 

l1e\v participants into insurance markets~ and if they are not available in many states~ the 

nature ofinsurance markets \vill change dramatically-, increasing the risk of insurers and 

decreasing availability to middle-income Americans. Ifthis was the intent of Congress, it 

sllrely would have made it far more evident. 

The ACA is admittedly nOl a model ofclcar drafting. It contains three sections with the 

same number (1563) and amends an existing provision of the Public Health Services Act 

inconsistently twice within the scope of a few pages. The Senate bill was not supposed to 

be the final law. Only Senate the election in Massachusetts in early 2010 made a 

conference commi11ee bill that would have reconciled the House and Senate versions and 

cleaned up the current bill impossible. The courts arc unlikely to lind the "eslablished by 

the state,t language a "scrivener's error." But the courts will interpret the ambiguous 

language in the context ofthe ACA's structure and purpose, in light of the ACA's 

legislative history, and putting great weight on the HCERA amendment, and find that 

federally facilitated exchanges can in fact issue premium tax credits. 

The Department ofthe Treasury is Authorized to Interpret Section 368 and the 

Courts will Defer to its Interpretation 

Finally, the courts arc likely to granl great deference to the -IRS premium tax credit 

regulation. Section 36B explicitly grants authority to the IRS 10 interpret the section. A 

recent CltS Legal Analysis of this issue states clearly that under the ruling "Chevron 

ductrine," derived irom the case of Chevron v .. NRDC, 14 courts will delcr to lhe 
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interpretation orthe IRS of section 36B unless they conclude that "Congress has spoken 

to the precise question at issue." As should by now be amply clear. Congress has not 

clearly said that federal exchanges cannot grant premium tax credits. If a court tinds the 

issue ambiguous, hmvcver, "the question for the court is whether the agencis illlswer is 

based on a pem1issible eonstmetion of the statute." In this situation, "legislative 

regulations are given controlling weight unless they are arbitrary, capricious, or 

manitestly contrary to tbe statute." As noted above, the interpretation ofihe ACA by the 

IRS is completely consistent with rather than "manifestly contrary" to the slatute, and 

thus will be granted judicia I deference. 

Conclnsion 

Tn 2014, m11lions of your constituents will gain access to private health insurance 

coverage ""ith assistance with premium tax credits. It was the hope of Congress and 

remains the hope of the federal agencies implementing the ACA that they will receive 

these premium tax credits through state exchanges. But the ACA also created fallback 

lederal exchanges, which will be available in states represented by olher members of this 

Committee to ensure that all Americans get access to aflordable health insurance. The 

Department of the Treasury has correctly determined based on the language and history 

of the ACA that premium tax credits will be available through all exchanges, state and 

federally facilitated. None oryour constituents will be denied the tax credits made 

available through the ACA to ensure them access to afTordahlc health insurance. I thank 

you for the opportunity to address this impotiant issue. 
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86 

William G. Schiffbauer 


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1110 Good Deed Goes Unpunished: Enforcing an Individual Health Insurance Mandate 

By W!LU""\1 G. SCHIFFBAUER, ESQ. subsidies for lower-income individmds :,md 

Enforcing an Individual Mandate 

The Insured Musi Prove Compliance 

COPYRIGHT ,~ 2009 BY THE BUREAU OF NATION,\L AFF"-.IRS. ISSN 1528-2953 
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nism for a health insurance mandate which will be 

borne by individuals who already have health insurance 

and those "compelled" to have coverage. 

Enforcement Model. The Commomvealth of Massachusetts is the only jurisdiction in the United States to 

require the individual purchase of health insurance and to enforce this mandate through its income tax system, 

Accordingly, the state's income tax-based enforcement 

mechanism is a likeJy "model" for implementation of 

the federal health insurance mandate. 

was unable to obtain affordable health insurance due to "hardship" or other circumstances. 

Numerous Penalty Exemptions Provided 
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Tax Filing Retrospective, Not 

Contemporaneous 

Tn addition, the 

BNA"S HEALTH PlA~~ & PROVIDER REPORT ISS1\ 1528-2953 

is to coverage 

Americans who are uninsured, a significant number 

the uninsured have incomes at or below the federal poverty level and \vould not be tax filers under current Jaw, 

As a would not be 

tax-based enf'orcement 

BNA 7-15-09 
89 

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