IRS not ready to detect Obamacare fraud

Back in July, HHS delayed the implementation of anti-fraud measures that were designed to keep cheats from gaining the system to receive subsidies and insurance for which they weren't eligible.

Great news for fraudsters. Bad news for taxpayers.

Now, a Treasury Department IG report says that the IRS has the sophisticated programs in place to accurately determine the amount of subsidy for each taxpayer, but is falling far short in developing anti-fraud systems.


The ACA Program has not yet completed a fraud mitigation strategy," the report said. "It is important for the IRS to thoroughly consider fraud threats and risks that could impact new ACA systems."

The IRS said it was addressing the issues identified in the TIGTA audit, which was completed in July. The White House referred questions to the IRS.

Acting IRS Commissioner Danny Werfel said the IRS was prepared to administer the credits.

"The IRS has a strong, effective system in place for administering the Premium Tax Credit," Werfel said. "We have a proven track record of safely and securely transmitting federal tax information, and we have a robust and secure process in place to deliver this important credit for taxpayers."

Since the Affordable Care Act exchanges went live on Oct. 1, tech issues have plagued the website, embarrassing the Obama administration and the Health and Human Services Department.

Soon, the IRS could find itself in the hot seat, too. The agency is charged with distributing the Obamacare tax credits starting in January and also with assessing penalties for not holding insurance.

So far, the agency has avoided negative attention.

Lower-income taxpayers who purchase insurance on the exchanges can qualify for tax breaks that help them pay for insurance premiums - refundable tax credits that can be claimed at the end of each coverage year on a taxpayer's return.

Alternatively, Americans can estimate their incomes for the upcoming year and have an estimated tax credit paid in advance directly to their health insurance providers. Those are supposed to be reconciled the following year, depending on whether the person makes more or less than what he or she estimated.

The IRS's task of distributing health insurance credits has made many Republicans uneasy - particularly because other refundable tax credits administered by the IRS have high fraud rates.

Top Finance Committee Republican Orrin Hatch (Utah) has been one of the most outspoken critics of IRS capabilities to administer the ACA credits, and on Tuesday he called the refundable credits a "fraudster's dream come true."

"The very nature of these credits - pay first, verify a person's income later - will lead to potentially hundreds of billions of dollars of improper payments and could put millions of Americans' personal information at risk," Hatch said.

History shows that if it's easy to game the system, Americans will take advantage. The level of fraud in programs like SNAP (food stamps), and Medicaid is mind blowing. Some estimates go as high as 10%.

The reason for this is simple; there is no incentive to protect the taxpayer's money. Expediency is more important than preventing rip offs. Federal investigators find only a tiny amount of the fraud committed against the taxpayer because they just aren't looking very hard.

There are two ways to rip off the taxpayer in Obamacare; lying about income in order to receive a bigger subsidy and lying about having "qualifying insurance" from work - insurance plans that meet Obamacare's mandated coverages - in order to get a better plan on the exchange with a subsidy. As it stands now, the IRS, HHS - no government agency - has the ability to detect this fraud.

I'm not sure Senator Hatch isn't overstating the case when he talks about "hundreds of billions" in fraud. That presupposes that the vast majority of Americans are crooks. There will  be a couple of hundred billion in subsidy payments, so his claim is more exaggeration than real.

But what's almost certain to happen is that billions of taxpayer dollars will be sent to undeserving fraudsters. And this will be true even when the IRS sets up their anti-fraud program. As Robert Kerr, senior director of government relations at the National Association of Enrolled Agents told Politico:

"Refundable credits are fraught with fraud peril. "Lots of money goes out the door, and IRS generally cannot determine in advance whether the taxpayer is truly eligible."

This will be even more true in 2014.

If you experience technical problems, please write to