Although the overall effects of the Obama administration's health care reforms may not be known for years, they promise to significantly affect CPAs and their clients.
The massive health care reform legislation, which was signed into law on March 23, 2010, raises nearly $400 billion through tax increases on high-income individuals, excise taxes on high-cost group health plans, and new fees on selected industries.
"It's not just a health bill, it's a tax bill," said Roger Harris, president of Padgett Business Services. "No one should be surprised that it will be enforced by the IRS. Somebody's got to enforce it, and if you're going to have mandates and taxes and revenue to be collected, who else would do it?"
While estimates of additional hires the IRS will need to enforce the law range as high as 17,000, the actual figure has not been finalized. (See "An Obamacare timeline, below.)
"One of the things that stands out is the extent to which the bill is paid for by taxes on high-income individuals," noted Clint Stretch, managing principal for tax policy at Deloitte Tax. "Essentially, half the taxes in the bill are on high-income individuals ... . The idea that people with very high income will get more benefit from Medicare is not obvious, so this is saying that entitlement programs should be paid for by taxes on high-income individuals. Down the road the challenge will be how that outlook combines with other taxes that Congress will want in the face of the expiring Bush tax cuts, so this sets up a vigorous fight over top tax rates for next year."
Stretch cautioned that CPAs should take note of a provision in the Reconciliation Agreement (the House "fix" that allowed the act to pass through the Senate with 51 votes in lieu of 60) that codifies the economic substance doctrine.
"In a nutshell, it requires that transactions have economic substance apart from tax, and a bona-fide business purpose. It imposes strict liability on taxpayers that violate the doctrine," he said.
A 40 percent strict-liability penalty would apply to tax understatements attributable to undisclosed non-economic-substance transactions. The penalty would be 20 percent if a transaction is adequately disclosed.
If a CPA advises their client to enter a transaction that ultimately results in the client becoming responsible for a penalty, then the client could conceivably sue the CPA.
According to the explanation issued with the legislation, the provision is not intended to alter the tax treatment of basic business transactions in which the choice between meaningful economic alternatives is largely or entirely based on comparative tax advantages, observed Stretch.
"Thus, outside opinions would not protect a taxpayer from the penalty if the transaction lacks economic substance," he said. "It will require professionals to be very careful in dealing with transactions that are not standard fare. They will have to really look and understand if they are at risk."
The business-payment reporting requirement under the new law, effective for payments of more than $600 after 2011, extends the obligation under current law to report payments to corporations as well as individuals. The act also expands the kinds of payments subject to reporting to include the amount of proceeds paid in consideration for property or services.
"This might be especially burdensome for smaller and medium-sized organizations," said Stretch. "It dramatically increases the number of information returns that businesses and CPAs themselves have to file."
Henry Paula, a tax principal with the Reznick Group PC, believes it is unnecessary for CPAs to advise clients on the medical plans and coverage requirements of the new law: "What we can do is talk about the tax pieces that will impact them."
To that end, he suggests that high-income clients consider taking less in wages in return for more distributions of each year's taxable income to avoid much of the increases in Medicare taxes. "They should also ensure that the maximum is contributed on a pre-tax basis to 401(k) and other qualified plans from annual wages, since these portions of wages are not subject to Medicare tax," he said. "And bonuses should be paid prior to 2013 to withhold as much as feasible and justifiable under the circumstances and reduce the portion subject to the increased Medicare tax."
DATES STILL UNCERTAIN
One of the positives about the act is the fact that most of the provisions have delayed effective dates, according to Brenda Schafer, manager of tax analysis at the Tax Institute at H&R Block: "Just a few are effective now, such as the adoption credit and the small-business credit. Everything else doesn't start to take effect until at least next year, and the provisions that would require most individuals to carry coverage will not take effect until 2014. There will be time to understand how it affects us both as individuals and businesses."
Meanwhile, court challenges, future elections and legislation may play a role in the ultimate implementation of the law. "At least 13 states have filed to contest the constitutionality of requiring individuals to carry coverage," said Schafer. "The thinking is that the federal government is overstepping its bounds, and that it's an issue that is up to the states to determine. By 2014, portions of the bill could be repealed before they take effect."
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