Subsidy Clawback Abuse?

dgoldenz

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Virginia
If someone earning $300k/year puts down on their subsidy application that they earn $35k/year and at the $35k income level would be eligible for a massive premium subsidy that has a max clawback of $2500/year, why wouldn't everyone over 400% of FPL just take a subsidy and pay the $2500 clawback every year? Other than moral/ethical issues of course...

Doesn't seem that it would be illegal to do this since the app asks you to estimate your own income. Am I missing something here?
 
The clawback for people over 400% of FPL is 100%. The $2500/year max clawback is for lower income levels.

Also, knowingly misstating income to the IRS is fraud. This is kind of like the person who says, "why don't I just tell the insurance company I don't have Diabetes, and if they find out they can only rescind my policy from the date they found out." Well, true. But, like you said it's illegal and unethical. It's also fraudulent.

I'm not saying people won't do it. Also, these subsidy applications could overwhelm China's budget for it and thwart the system. That might be funny. But it's not correct.
 
The clawback for people over 400% of FPL is 100%.

So where does the line blur between knowingly misstating something and making a bad guess? Self-employed people's income is all over the place from year to year....so one year you are at 395% of FPL and the next year you wind up at 800% of FPL. At what point does your guess on expected income become "fraud"?
 
So where does the line blur between knowingly misstating something and making a bad guess? Self-employed people's income is all over the place from year to year....so one year you are at 395% of FPL and the next year you wind up at 800% of FPL. At what point does your guess on expected income become "fraud"?

I would say when they can show you knew better. You consistently make 400%+ of FPL, but say 200% for the subsidy, your income for the last few years has fluctuated between 300% and 600% of FPL and you claim 200% for subsidy purposes.

You claim 300% for next year, but know that you will receive a bonus early in the year that will certainly put you well over that.
 
This pencils out to be ripe for gaming at every level not just the above 400% level. To the tune of several thousands of dollars a year per gaming scenario. Play with the numbers based on the penalties and you'll see. Ann's right of course it could be deemed fraud especially at w-2 level but for the self-employed whose income fluctuates freely, who knows? And why not guess low income, at least you get an interest free loan until the clawback. Ann, ask your husband if the IRS allow that very often :no:
 
Speaking of blurring the lines . . .

Officially your Obamacare application is for health insurance, but the tax & income information + IRS involvement makes it also a tax form . . . kind of.

Can an insurance agent legally give tax advice?

I don't think so.
 
But why update during the year, unless it's going down? The clawback is only for those that don't report AND understated their income
 
Fraud is hard to nail down.

Take insurance for instance - it's the prudent man rule. If a normally prudent person WOULD HAVE KNOWN......

So, if you're 6 months pregnant, haven't been to the doctor, and say on an app you're not pregnant, they will say it's fraud or misrepresentation because a normally prudent person would have known. Fraud investigators use the smell test. Same thing for the IRS. These guys have read the book and seen the movie. They can smell a fraud when they are opening the file. And who will they go after? The 6-figure income person. In fact, if this "abuse" of subsidies goes viral, the administration will pick people to make an example out of. It will be the business owners with consistent 6-figure incomes who they choose.

Tax is due as of the filing date. So, if you get a subsidy in 2014 (that you are really are not qualified for), you get the clawback on your 2014 Federal 1040 Tax Return that is filed by 4/15/2015. If you don't pay it 4/15/2015 then the penalties and interest begin to accrue. There are special situations where the estimated tax isn't adequate, or things like that, where there could be other penalties and interest, but for the most part the penalty and interest would begin to accrue on the April 15th filing date, if you didn't pay back the claw-back by then.

Disclaimer - I'm not a professional tax advisor. My husband is, but that doesn't mean I know squat. This is just my understanding, based on how other tax penalties & interest work, and I have not seen anything in PPACA that states that this claw back will work any differently.
 
Fraud is hard to nail down.

Take insurance for instance - it's the prudent man rule. If a normally prudent person WOULD HAVE KNOWN......

So, if you're 6 months pregnant, haven't been to the doctor, and say on an app you're not pregnant, they will say it's fraud or misrepresentation because a normally prudent person would have known. Fraud investigators use the smell test. Same thing for the IRS. These guys have read the book and seen the movie. They can smell a fraud when they are opening the file. And who will they go after? The 6-figure income person. In fact, if this "abuse" of subsidies goes viral, the administration will pick people to make an example out of. It will be the business owners with consistent 6-figure incomes who they choose.

Tax is due as of the filing date. So, if you get a subsidy in 2014 (that you are really are not qualified for), you get the clawback on your 2014 Federal 1040 Tax Return that is filed by 4/15/2015. If you don't pay it 4/15/2015 then the penalties and interest begin to accrue. There are special situations where the estimated tax isn't adequate, or things like that, where there could be other penalties and interest, but for the most part the penalty and interest would begin to accrue on the April 15th filing date, if you didn't pay back the claw-back by then.

Disclaimer - I'm not a professional tax advisor. My husband is, but that doesn't mean I know squat. This is just my understanding, based on how other tax penalties & interest work, and I have not seen anything in PPACA that states that this claw back will work any differently.
This is all true, but the IRS is wrong more times than not...I just received a notice from them yesterday accusing me of understating my income based on a high HSA distribution. They sent me a $7K bill for unpaid taxes, penalties and interest. Due to an illness and a pregnancy, guess what? They are wrong! They found that if they turn my HSA distribution into income, they could eliminate several of my deductions because it would push my income into a higher bracket.

According to my CPA, the IRS is on fishing expeditions trying to close the tax gap and their favorite target is small business owners and self employed. It's actually a good tactic poorly executed. If they had sent me a bill for $300, I probably would have paid it, but $7K is a bit different. I wonder how many self employed folks get these letters, get scared and send in a payment plan?

Back to the point, if this tactic is done by a large enough population, I see a new area of practice for lawyers. Defend the victims of the IRS! "Have you been accused of fraud by the IRS because you inadvertently underestimated your income for subsidy purposes? Call me know to protect you from the evil tax man!"
 
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