IRS defends against GOP charges of 'illegal' healthcare tax credits

The head of the IRS defended his agency Thursday from Republican charges that it is illegally handing out tax credits under President Obama's healthcare law.

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Republicans and conservative policy experts say the IRS has gone too far in implementing the Affordable Care Act, specifically its subsidies to help people buy private insurance.

IRS Commissioner Douglas Shulman said the agency doesn't plan to reverse itself and is properly interpreting the law. 

"I fully understand that you've got a view on this and that we disagree ... our legal experts came down on the side we came out with," Shulman said at a House Oversight and Government Reform Committee hearing.

The Affordable Care Act sets up insurance exchanges where people can buy insurance, usually with help from a federal subsidy. The law directs each state to establish an exchange and sets up a federal fallback in states that don't.

Republicans say the law only makes subsidies available in state exchanges — not the federal marketplace — because it refers to exchanges "established by [a] state." But the IRS has said it will provide subsidies in both the state and federal exchanges.

Rep. Scott DeJarlais (R-Tenn.) accused the IRS of exercising "unprecedented power to rewrite a rule and bypass Congress," arguing that lawmakers never intended to provide subsidies in a federal exchange.

"The IRS is actually going between or bypassing Congress, and there's a clear separation of powers issue here," he said. "If people are willing to let the IRS simply write the new tax rules, then I think we're going to have a real problem."

Shulman said the IRS isn't doing anything more than trying its best to implement the law as Congress wrote it. Although the subsidies provision refers to state exchanges, he said, a reading of the entire law indicates that Congress wanted state-based and federal exchanges to serve the same functions.

"There's actually a process in this country that allows Congress to write the laws, we implement them, and if there's a disagreement, there's always the courts," Shulman said.

DeJarlais told reporters that he hasn't explicitly urged businesses to challenge the IRS rules in court, but conservative policy experts say it's an option worth pursuing.

Michael Cannon, a health policy analyst with the libertarian Cato Institute, said businesses can sue now, even before the policy takes effect in 2014.

Employers might be able to sue over the subsidies because businesses will have to pay a penalty for each employee who receives a subsidy from the federal government. Because of the employer penalties, Republicans said, the IRS's approach to subsidies is also an illegal tax increase on businesses.

Shulman also pushed back against Republican claims that the IRS will be hiring thousands of new agents to enforce the healthcare law and might throw people in jail because they don't have insurance.

"I think it's been way overstated, our role in healthcare," he said.