IRS could tap refunds for health insurance penalties

* IRS cannot use levies, seizures, criminal sanctions

* IRS chief: Republican estimate for new hires "made up"

By Kim Dixon

WASHINGTON, April 5 (Reuters) - The Internal Revenue Service could tap individual tax returns to collect fines against people who fail to buy health insurance as required under recently enacted healthcare legislation, the U.S. tax commissioner said on Monday.

Most individuals are required to get health insurance under the new law, or face penalties that would be phased in over time. By 2016, people without coverage could see fines of 2 percent of their income.

Subsidies would help poorer people buy coverage, and states would set up exchanges to allow individuals and small groups shop for insurance.

People who do not comply would be levied penalties, and if they don't pay them the penalties could be taken out of their tax refunds.

"There has been some insinuation about how we are going to approach our job," IRS Commissioner Douglas Shulman said after speaking at the National Press Club.

Under the new law, the IRS cannot seize assets or levy fines, so Shulman said refunds were the most obvious option to collect penalties.

The new law aims to expand coverage to about 32 million uninsured Americans.

Last month, President Barack Obama signed the legislation, which passed both houses of Congress with backing only from his fellow Democrats. Republicans have been attacking the bill ever since, calling it an overreach of government power.

Representative Dave Camp, a senior Republican on the tax-writing Ways and Means committee in the U.S. House of Representatives, issued a report shortly after its passage arguing that law "dangerously expands IRS authority."

"The individual mandate would create millions of captive customers for health insurance companies, with the IRS acting as the enforcement agency for those companies," Camp's report asserted.

NEW AGENTS?

Shulman also dismissed claims by Republicans that the government would need to hire 16,500 agents to enforce the new rules.

"That is a made up number. The only official numbers come from the IRS, which I have to sign off on. We don't have a number yet," Shulman said.

A staffer for Republicans, which circulated the 16,500 estimate, defended it on Monday.

The staffer said the number was based on an estimate by the Congressional Budget Office that $10 billion would be needed to implement the law over a decade, subtracting $1 billion for administration costs.

"If it's not 16,500, how many thousands of people will the IRS have to hire to enforce their portion of the bill?," the aide, who was not authorized to be quoted by name, said. "How is the IRS going to spend billions of dollars in taxpayer money to enforce its portion of the bill?"

Shulman, appointed by former President George W. Bush and retained by Obama, said the U.S. health department and insurance companies would determine if individuals have purchased acceptable levels of coverage.

"There are not going to be IRS agents having discussions with the American people about the intimate details of their health insurance," Shulman said.

None of the provisions related to individual taxpayers come into force this year, with most phased in in 2013 and 2014, he said.