Many fear it will take a long time to process ACA exemption applications near tax day. Get ready for Obamacare tax chaos

There are dozens of ways to escape Obamacare’s individual mandate tax — but good luck figuring that out come tax season.

Tens of millions of Americans can avoid the fee if they qualify for exemptions like hardship or living in poverty, but the convoluted process has some experts worried individuals will be tripped up by lost paperwork, the need to verify information with multiple sources and long delays that extend beyond tax season.


“It’s not going to be pretty,” said George Brandes, vice president of health care programs at Jackson Hewitt, a tax prep firm. “Just because you theoretically qualify for hardship, or another exemption, doesn’t mean you’re going to get it.”

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The worries may foreshadow a messy tax season next year as the one in 10 Americans who remain uninsured calculate their tax bill for the first time under Obamacare’s individual mandate.

Those without health insurance will have to cough up $95 per person or 1 percent of their income, whichever is greater. That penalty eventually jumps to $695 or 2.5 percent.

The White House expanded the list of exemptions allowing the uninsured to bypass the penalty for legitimate reasons, including religious restrictions, falling on rocky times or a death in the family. Another big out created after the controversy over canceled health plans was the so-called affordability exemption that allows people to opt out if premiums are still not affordable.

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The Congressional Budget Office expects 23 million of the 30 million Americans who remain uninsured in 2016 to qualify for exemptions. It’s part of the reason the CBO in June downgraded from 6 million to 4 million the number of people it estimates will pay the penalty.

The uninsured have two ways to opt out: The easiest way is fill out a new tax form for those exemptions that don’t require Obamacare marketplace approval. Some will be simple, including the exemption for being uninsured for under three months or those living below a certain income — about $10,150 for singles and $20,300 for married couples.

But many must be approved by the marketplace, including for people citing religious beliefs, like being Amish, or those who qualify for the dozen or so “hardships,” such as being evicted, experiencing domestic violence or having a health plan canceled because it doesn’t meet the law’s requirements.

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There’s even one for being in jail, another for having medical debt and one for taking care of sick family members. An open-ended “hardship” exemption lets people try to explain situations not listed that stood in their way of coverage.

That’s where things get complicated. For marketplace approval, applicants must fill out an exemption application, gather proof of their situation, mail it off and wait a few weeks for approval.

Once they get the exemption certification number in the mail, they then fill out a newly drafted tax form to skirt the penalty.

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Some math may be required: If the exemption covers only a few months of the year, the individual is responsible for calculating how much of the penalty he or she will owe.

The process brings up a number of problems, the first being a time crunch. The marketplace is now taking about two weeks to process exemption applications, according to H&R Block. Many fear it will take much longer during tax season, particularly because the entire process is manual.

Given how most people wait until the last minute to do their taxes, there is concern delays could push beyond tax day, April 15.

“What happens on April 14 when you go to the marketplace and file for an exemption?” asked Kathy Pickering, the executive director of The Tax Institute at H&R Block.

Nina Olson, the IRS taxpayer advocate, said her team is “very worried that taxpayers will have returns coming in where they believe they’re covered by exemptions but they haven’t gone through the steps … particularly those needing” approval.

“What are we doing with that return in the meantime while the taxpayer goes … [for approval]? … Are we holding the entire refund?” she asked.

TurboTax estimates that less than 5 percent of exemption-eligible people have applied so far, suggesting a lack of education on how the process works.

The Centers for Medicare and Medicaid Services says it does not expect many people to apply for exemptions after Jan. 1, but many tax preparers predict the opposite. They say most uninsured individuals will come to their offices in early 2015 not knowing how to apply for exemptions — or even that they can opt out.

They then could have to return home to begin the paper scramble. While exemptions for homelessness and domestic violence require no proof, most hardship applicants will need to search for utility notices of power being turned off, for example, bankruptcy papers or insurance claims for disaster victims of floods or fires.

Some uninsured may have to pay tax prep fees twice. That’s because many also live in poverty and each year depend on tax refunds to pay rent, car bills and other essentials. They may simply pay the tax penalty to get their refunds right away — then return to the tax preparers later to file an amended return once they get their exemption certifications weeks later.

Others, who can afford to wait, may ask the IRS for an extension to file their taxes.

Not everyone is worried about the exemption process.

TurboTax’s Obamacare tax product leader Sacha Adam predicts it will all work out: “It seems like a lot of people say this is too complex. … But that’s not our perspective.”

But the company is also hoping the IRS will allow people waiting for exemptions from the marketplace to simply file their returns and skirt the penalty without the exemption numbers.

That’s far from a certainty, however.

Many experts do not think average Joe Taxpayer will be able to figure out the exemption tax forms.

“They are likely to be confused, frustrated, even angry, and certainly bewildered, completing these forms,” said Tim Jost, an Affordable Care Act expert.

The Washington and Lee University School of Law professor is concerned about how individuals will claim the so-called affordability exemption, which would require people to confirm that they could not find insurance with premiums costing less than 8 percent of their income.

Individuals will not be required to submit paperwork proving to the IRS that coverage costs more than 8 percent of their salaries, but experts say tax preparers will want to confirm this for themselves in case of audits.

The new exemption-tax-form instructions come with a chart for claiming this exemption, requiring entry of how much was earned each month and comparing that with the monthly cost of the cheapest plans offered by an employer or the marketplace.

Jost is not sure that information will be readily available because employers have no legal obligation this year to respond to employees’ inquiries, since the ACA’s “employer mandate” has been delayed until next year.

Elizabeth Colvin of Austin Foundation Communities has seen plenty of instances where businesses haven’t provided needed information to employees to help them navigate ACA, and worries the same may happen here.

“They may not be responsive, but they also may try to give the information and not understand what needs to be provided,” she said. “There’s a pretty steep learning curve.”

If their employers did not offer coverage, people claiming the affordability exemption will have to check the Obamacare exchanges to ensure the cheapest plan available to them in 2014 — minus the Obamacare tax credit they would have received had they signed up for the plan — exceeded 8 percent of their income.

But it’s unclear that the exchanges during tax season in early 2015 will have the ability to retroactively determine how much people would have had to pay for insurance, Jost said.

Observers are also concerned about the Medicaid exemption for individuals who would have qualified had they not lived in a state that refused to expand it. In Florida and Texas alone, that’s around 1.8 million people.

Currently, these individuals who applied and were rejected on the federal website HealthCare.gov will be mailed an exemption certification to use on their tax returns, according to CMS. But those who applied directly through their state will have to find their rejection notices and send them to the exchanges to get exempted.

What happens if people can’t find their rejection notice? Or if they knew they wouldn’t qualify in 2014 so didn’t bother applying at all?

The good news is that the uninsured have many exemptions they can try to claim should one fall through the cracks.

While some expect the uninsured to throw their hands up and just pay the penalty, one thing is certain: Many who try to get around it will have to muddle through a confusing process.

“If taxpayers are in a situation where they want to apply for an exemption, they’re going to have a lot of work to do to figure it out,” Pickering said.

Brett Norman and Kyle Cheney contributed to this report.