Q. Is the Obamacare individual mandate just based on the honor system?
A: In some ways, yes. But although the individual mandate penalty cannot be pursued via most of the normal avenues that the IRS can use to collect other taxes, it’s illegal to lie to the IRS, regardless of the circumstances.
In addition to the honor system, there are several new tax forms that are filed by health insurance carriers, employers, and the exchanges – so the IRS obtains concrete data from numerous sources to supplement the details they receive from each individual tax filer.
If you buy coverage in the exchange, the exchange will report to the IRS (and you) regarding the coverage you had during the year and any advance premium tax credits (subsidies) that were paid during the year – this is reported on form 1095-A (reporting began in early 2015 for the 2014 tax year, and has continued annually ever since).
Employers with 50 or more full-time equivalent (FTE) workers use forms 1094-C and 1095-C to let the IRS know whether they offered affordable, minimum value coverage to their employees, and whether each employee accepted the coverage.
All employers who provide “applicable employer-sponsored coverage” must report the cost of employer-sponsored health insurance on employees’ W2s. (This does not impact employees’ taxable compensation.) When this requirement was first implemented in 2012, there was transitional relief for employers with fewer than 250 W2s; they were encouraged to report health insurance costs on employees’ W2s but it was not mandatory. The requirement has been updated now to apply to all employers who offer “applicable employer-sponsored coverage.”
Health insurance carriers use form 1095-B to let the IRS know which months their policyholders had minimum essential coverage during the year. As with large employers, this reporting was required starting in 2015.
So although the honor system is involved – as it is with many aspects of our tax system – there are several avenues for the IRS to obtain information beyond what filers report on their tax returns. The individual mandate penalty still applies for 2017 and 2018, as the 2017 GOP tax bill doesn’t repeal it until 2019. Starting with 2019 tax returns (filed in early 2020), there will no longer be a penalty for not having insurance, but forms 1095-A and 1095-C will still be filed by the exchanges and employers, so that premium subsidies can be reconciled on tax returns.