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April 7, 2017


IRS May Have 'Dodged a Bullet' With AHCA Failure


Andrew Velarde, Tax Analyists

TaxNotes Document Service

Doc 2017-4244


The IRS may have "dodged a bullet" from an administrative perspective with the implosion of the Republican plan to repeal and replace the Affordable Care Act, a former Treasury official said March 30.

The American Health Care Act (AHCA ) "would have required the IRS to undertake full administration of the new tax credit," said Lisa Zarlenga of Steptoe & Johnson LLP, formerly Treasury tax legislative counsel. "The IRS would have to itself determine the amount to advance and the amount that individuals should be getting in this credit," she said on a webcast sponsored by ALI-CLE. Under the plan originally introduced by House Republicans, credits ranging from $2,000 to $4,000 were available to taxpayers based on age, but those limits were later subject to negotiation after reports indicated that the initial plan would disadvantage older, poorer taxpayers.

Zarlenga contrasted the Republican proposal with the ACA, under which the IRS "simply provides taxpayer information to the healthcare exchanges and the healthcare exchanges verify the income and administer the credit."

She added that the AHCA's removal of the healthcare exchanges likewise would have made the administrative burden heavier for the IRS because the agency would have had to deal with individual insurance companies. In describing the AHCA's failure as a near-miss for the IRS, she noted that "it remains to be seen if Congress will turn its attention back to that."

Following the failure of the bill, indications from Republican policymakers have been mixed regarding whether and when another effort will take place. 

The IRS has also spent considerable resources in implementing the ACA, money that would largely be wasted if the law were repealed, Zarlenga noted. She ticked off previous administrative outlays for the ACA, including sunk costs related to implementing a system of information reporting to enforce the individual mandate and determine the premium tax credit and a system to report and collect allocated taxes, specifically the health insurer fee and fee on brand-name prescription drugs.

"The amount was allocated to market participants effectively based on their share of the market. This had not previously been done. The IRS came up with an entirely new system to do a quick mini-audit of that," Zarlenga said.

The averted administrative burden comes against a backdrop of declining IRS resources, including a loss of 15.6 percent of the workforce since 2010. An early version of President Trump's proposed budget would further slash funding from the IRS's $11.2 billion budget by $239 million. 

But on the webcast, Jorge E. Castro of Castro Strategies LLC noted that the dedication of significant administrative resources may still be required of the IRS with another, potentially larger legislative vehicle on the horizon: the House blueprint on tax reform. The enactment of that plan would require the development of substantive rule changes at the IRS, something that would be a "very heavy lift," Castro said.

"Let's take, for example, the border adjustment tax -- first of its kind in the U.S. The IRS has never implemented it. They have never collected the tax. So you could imagine the IRS and Treasury staff would have to devote a lot of resources to developing and implementing those rules," Castro said. He added that the development of transition guidance toward the novel approaches, such as the denial of interest expense, would also place an administrative burden on the agencies.

Retraining the IRS workforce, including examiners, to implement and enforce the sea change would also require substantial resources, Castro said. For example, the blueprint's contemplated move from a worldwide to a territorial tax system would put a lot of pressure on the Large Business and International Division -- a section that has already had two substantial reorganizations over the last several years -- to develop new practice units, he said.

The blueprint calls for a new "streamlined" IRS that would collapse its structure into three units: families and individuals, business, and small claims court.

Merging the Small Business/Self-Employed Division with LB&I could result in a loss of expertise at the IRS, Castro said. He added that several important questions were left unanswered in the blueprint, including the fate of the Office of Appeals and Tax-Exempt and Government Entities Division.

Redistributed with written consent of Tax Analysts







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