Q. Is the Obamacare individual mandate just based on the honor system?
A: In some ways, yes – particularly for 2014. 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.
The exchanges are notifying the IRS of coverage and any advance premium tax credits (subsidies) that were paid during the prior year – this is reported on form 1095-A, and reporting began in early 2015 for the 2014 tax year.
Originally, employers with 50 or more full-time equivalent (FTE) employees were to report coverage information to the IRS starting with 2014 data. But that requirement was delayed until 2015, so employers that reported 2014 coverage did so voluntarily.
Beginning with tax year 2015 (forms filed in early 2016), employers with 50 or more FTE workers will use forms 1094-C and 1095-C to let the IRS know whether they offered coverage to their employees, and whether each employee accepted the coverage. Businesses with 50 to 99 FTE employees are not required to offer coverage until 2016, but they are required to report coverage information to the IRS starting with the 2015 tax year.
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 policy holders had minimum essential coverage during the year. As with large employers, this reporting is required starting in 2015, but insurers were encouraged to voluntarily report 2014 coverage information.
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, particularly starting when 2015 tax returns are filed next spring.