ENLARGE This year, all taxpayers have to report to the IRS for the first time whether or not they had health insurance the previous year. Associated Press

By

Stephanie Armour AndLouise Radnofsky

Jan. 1, 2015 7:04 p.m. ET

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The first year of the Affordable Care Act is in the books, and now comes a tricky tax-filing season for millions of Americans.

The law’s requirement that most Americans carry health insurance means all filers must indicate on federal tax forms whether they had coverage last year and got tax credits to help pay for it. Those who didn’t have coverage could face a fine, although reduced staffing at the Internal Revenue Service and certain changes to the law mean the so-called individual mandate is expected to be lightly enforced this year, tax preparers say.

Meanwhile, millions of Americans who got subsidies under the law may find they are getting smaller-than-expected refunds or owe the IRS because credits they received to offset their insurance premiums were too large. As many as half of the roughly 6.8 million Americans who got subsidies may have to refund money to the government, based on one estimate by tax firm H&R Block Inc.

“The ACA is going to result in more confusion for existing clients and many taxpayers may well be very disappointed by getting less money and possibly even owing money,” said Charles McCabe, president of Peoples Income Tax and the Income Tax School, a Richmond, Va., provider of tax preparation and education. “The whole implementation of Obamacare will be frustrating for tax preparers.”

What if you didn’t have health insurance in 2014?

But the season could be a lucrative one for tax firms. Liberty Tax Service, a tax-preparation franchise, began calling hundreds of thousands of customers in November to invite them to a store to get help applying for an exemption to the insurance-coverage requirement. About half of the company’s 4,000 stores opened weeks ahead of their usual start date to provide health-law tax advice.

The IRS also is expecting more calls from consumers at a time when congressional funding for the agency has dropped nearly $1 billion since fiscal 2010, and its workforce has 13,000 fewer full-time employees than it did in 2010. Congressional Republicans opposed to the health law have said limiting the IRS’s budget is one way to slow the law’s implementation, including in last month’s budget agreement for the remainder of fiscal 2015.

IRS Commissioner John Koskinen , in a November speech, said his agency’s reduced funding would hamper its ability “to provide the level of taxpayer services that the public has a right to expect.”

To help avert problems, federal agencies including the IRS and the Centers for Medicare and Medicaid Services in January will reach out to consumers via phone calls, text messages and emails to tell them what to expect during the tax season. IRS officials are urging consumers to file electronically for a quicker return.

The original 2010 health law had more mechanisms to enforce the insurance-coverage requirement. It required employers to supply the agency with the names of about 150 million Americans who got coverage through their job.

But the Obama administration in 2013 delayed that reporting requirement. It also widened the list of reasons a person could avoid paying the penalty if he skipped insurance coverage, exempting certain people whose insurance plans were canceled because of the law.

This year, the IRS said it is entrusting consumers to answer honestly if they had health insurance or need to pay a penalty. While the agency said it won’t reject returns if questions about health coverage aren’t answered, it said consumers who don’t answer affirmatively that they had coverage will be expected to have an exemption or request one, or to calculate the penalty they owe. The fine for not having coverage starts at $95 and ranges up to 1% of household income, which would be added to 2014 tax liability.

Some makers of tax-filing software, including Intuit Inc. ’s TurboTax, say they have set up their systems to reject incomplete forms. But tax preparers say there is little to stop a filer from asserting they have coverage, thereby avoiding any penalty, even if they were uninsured. IRS officials note the tax system for years has been built on voluntary compliance, and the agency said it could use its regular enforcement tools, such as asking for more documentation or auditing.

ENLARGE

“As always, taxpayers are responsible for the accuracy of the information on the tax returns that they sign,” said Anthony Burke, an IRS spokesman. He added that “the vast majority of filers will have had coverage for the full year and will simply need to check a box to indicate that.”

The IRS also said it would allow taxpayers who have applied for—but not yet received—exemptions from the individual mandate to put “pending” on their forms so they don’t have to delay filing and obtaining their refund.

In addition to determining who has to pay a penalty, the accuracy of tax credits is likely to pose challenges. Because people often incorrectly estimate their future income, many Americans may have gotten subsidies—based on their own projections of 2014 income—that were too generous.

Tax credits for people eligible to use the health law’s exchanges would, on average, be too high by $208 if they were based on the applicants’ most recent tax returns, according to modeling by Vanderbilt University assistant professor John Graves. The IRS said some filers got subsidies that were too small and will get larger refunds.

When the health law was passed, the amount of money that could be taken back from lower-income people who overestimated their incomes was capped at $250 for a single person and $400 for a household. Those caps were significantly raised in an effort to fund Medicare physician payments in late 2010, to as much as $2,500 for a family at the upper end of the income-eligibility range. They were tweaked again in 2011 as part of a tax change to the health law’s 1099 reporting forms that required more people to reimburse overpayments in full.

Write to Stephanie Armour at [email protected] and Louise Radnofsky at [email protected]