(Bloomberg) – The Patient Protection and Affordable Care Act (PPACA) — Obamacare — is about to collide with the U.S. tax-filing season, adding frustration for millions of taxpayers trying to figure out how to comply and how much they will owe the government.
Tax filing for 2014 opens Jan. 20. The biggest change for most taxpayers is on Line 61 of Form 1040: a box to check if you have health insurance and a tax to pay if you don’t. Millions who received insurance through the PPACA public health insurance exchange system will have a more complicated set of calculations to complete.
“There’s going to be tons of questions and confusion and uncertainty and complexity,” said Kathy Pickering, executive director of the Tax Institute, the research and analysis division of H&R Block Inc. “We still have a lot of questions.”
See also: What H&R Block says about PPACA
The added strain on taxpayers will increase burdens on the Internal Revenue Service (IRS) at its busiest time of the year. The IRS is already warning that about half the people who call its toll-free phone lines won’t be able to get through.
“Because it’s never happened before, it’s a learning experience for everybody,” said Roberton Williams of the Tax Policy Center, a Washington research group. “This will be the hard year. Next year will be easier. Five years down the road, nobody will remember this was anything strange.”
The tax agency also says it will complete fewer audits this year because of a smaller enforcement staff.
Congress passed PPACA in 2010 to expand access to health-insurance coverage, and the law relies on the tax system for two important functions.
First, the IRS polices the requirement that individuals have health insurance, which can be satisfied with an employer-provided plan, a government program such as Medicaid, or qualified health plan (QHP) insurance purchased on the exchanges established under the law.
See also: IRS is PPACA enforcer, lawyer says.
Failure to have health insurance in 2014 generates a penalty of $95 per person or 1 percent of household income, whichever is greater, up to a high limit. Those thresholds will increase to $325 and 2 percent for 2015. For 2014, the maximum monthly penalty — for a high-income “shared responsibility family” with five or more members — could be as high as $1,020 per month.
The second major intersection between PPACA and the tax system applies to about 8 million people who bought QHP policies through the exchanges. About 85 percent of the people who initially enrolled received subsidies. Enrollees could choose to collect the subsidies in the form of a refund, after they filed their 2014 taxes, but most eligible enrollees chose to get an advanced premium tax credit (APTC), meaning that the money went directly to insurance companies in 2014.
Those subsidies were typically based on 2012 income and now must be reconciled with the taxpayers’ actual 2014 income and household size. Some taxpayers will owe the government money, with caps on the amount they have to repay. Others are supposed to get money back.
Both the individual mandate and the subsidies present complications for tax filing.
One issue with the mandate is that workers won’t get statements from employers that say whether their insurance met the law’s requirements for minimum coverage. The IRS delayed that requirement until the 2016 tax filing year, and the lack of information may limit the government’s ability to enforce the law.
The other complication is figuring out whether any of the exemptions to the penalty apply. They include the unavailability of affordable coverage, membership in a religious sect with objections to insurance, or a long list of circumstances under which the government can issue a hardship exemption, such as domestic violence and homelessness.
The subsidies affect substantially fewer people than the mandate — and could be trickier to navigate.
People who didn’t update their family status and income during 2014 will have particular difficulty. A bonus or a move to a higher-paying job could cause some to owe the government money that they never actually received — because it was sent straight to the insurance company.
“People are going to absolutely be blindsided,” said Steve Mankowski, a partner at EP Caine & Associates in Bryn Mawr, Pa., who is chairman of the National Conference of CPA Practitioners’ tax-policy committee. “It can take someone from getting a refund to owing money.”
One plus for taxpayers is that the IRS doesn’t have some of its usual tools to enforce the law. Congress prohibited the tax agency from using liens and levies to make people pay the individual mandate. The IRS can still reduce refunds.
The IRS is also going to be shorthanded this year, which will mean less customer service and less enforcement.
The administration says the Obamacare changes shouldn’t complicate things for most taxpayers and is directing people to the IRS and Health and Human Services websites for information.
“For the vast majority of Americans, tax filing under the Affordable Care Act will be as simple as checking a box to show they had health coverage all year,” Treasury Secretary Jacob J. Lew said in a statement. “We are working to ensure that whatever their experience, consumers can easily access clear information since this is the first year they will see certain changes to their tax returns.”
The IRS budget is $10.9 billion this year, down 3 percent from last year and 12 percent below what the administration requested.
The tax agency also must continue working on a problem it has struggled with for several years — criminals who steal others’ refunds through identity theft.
That’s especially an issue early in the tax season, when criminals can file tax returns and get refunds before legitimate taxpayers even know what happened.
The IRS has taken steps to address identity fraud, including on the number of refunds that can be sent to a single bank account or prepaid debit card.
“They have a much better handle on it, but it is still a problem,” said Edward Karl, vice president for taxes at the American Institute of Certified Public Accountants.
–With assistance from Alex Wayne in Washington.