On September 11, 2012 IRS Deputy Commissioner for Services and Enforcement Steven Miller testified before the House Ways and Means Committee. He was there to talk about the IRS' implementation efforts for Obamacare. One of the topics he discussed was the "protection" people have if they choose not to comply with Obamacare's individual mandate to purchase "qualifying" health insurance:
"The law clearly specifies that the IRS will not use levies or file notices of federal tax lien if taxpayers have unpaid amounts related to the individual coverage provision. Moreover, taxpayers will not be criminally prosecuted for non-payment of this amount."
Indeed, that's supported by the Obamacare statute. Sec. 1501(g)(2) makes it clear that the IRS cannot impose criminal penalties, levies, or liens. To be clear, the tax liability this refers to is the penalty for not complying with the individual mandate. For most families, the penalty will equal or exceed 2.5 percent of their adjusted gross income. But at least the IRS won't pursue taxpayers, right?
This is neither credible nor comforting for several reasons.
Money is fungible. It's extraordinarily-unlikely that a taxpayer will have a tax liability only due to not paying the penalty. Most times, taxpayers owe for all sorts of reasons–not reporting income, not being able to substantiate deductions, late payment or filing, etc. Just because a criminal penalty, levy, or lien is not being applied because of this liability doesn't mean that the unpaid fine isn't contributing to punishment for other unpaid tax liabilities. Nor does it mean that a partial repayment by the taxpayer will go first to other contributors to a tax debt. There's just no way to effectively silo these things.
Interest and non-criminal penalties will still apply. The IRS will still charge taxpayers interest and regular, non-criminal penalties on unpaid mandate fines. Let's say I earn $100,000 per year and have been wracking up $2500 non-compliance fines for four years. I don't just owe the $10,000 in back taxes. I also owe interest (currently around 4% a year) plus a "failure to pay" penalty of 0.5% for every month you don't pay (which never stops growing and compounding, by the way). Over time, that really adds up–the total interest rate could easily exceed 100% or more. A person consistently not paying the fine would wrack up multiple times their original liability. Can the IRS issue liens or criminally pursue for the interest alone? Probably.
What about the other 19 taxes in Obamacare? This fig leaf of protection only extends to the individual mandate penalty. What about failure to pay some of the other 19 new or higher taxes in Obamacare? Someone, for example, not wanting to pay the new 3.8 percent surtax on savings would face not only the interest and failure to pay penalty described above, but also the criminal penalties, liens, and levies the statute deals with. Ditto for the medical device manufacturing tax, the tanning tax, the new limitations on HSAs and FSAs, etc.
Don't worry, taxpayers. The IRS won't come down hard on you if you don't comply with the individual mandate. Just ask them.