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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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Tax liability on insurance receipts

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.

Q: I am covered by two heath insurance polices, an individual Blue Shield of California policy and an Aetna Group policy. I submitted claims to both companies. The way that I was advised by my main insurance savvy attorney to bill these two to ensure I get all the benefits I’m entitled......was to use the blue shield for the my copay to provider..and submit a paid in full bill to Aetna showing full price of all charges. Do you think, or is there any precedent which you know of where the IRS may try to levy any type of tax on the insurance reimbursements? Now I’m dealing/facing an IRS audit and they are asking for my personal bank statements which show about $4,000 to $7,000 monthly in deposits from my reimbursements.

A: It seems that you received some very bad legal advice. It is illegal in California and all other states to be covered simultaneously by two primary insurance companies and to submit claims to both companies. This is common knowledge in the legal community and so it is unlikely that this advice was from an “insurance savvy attorney”. Clearly what you describe is insurance fraud. From a tax standpoint, any cash reimbursements you received that are in excess of the amount you paid to medical providers is taxable income. So the IRS audit will likely result in a notification to the insurance companies as well as a bill for taxes penalties and interest on the excess payments. When the insurance company notifies the state of the fraud discovered, the state may also elect to prosecute. You have a serious legal problem as well as a tax problem. The high dollar amounts of the transactions you describe create serious very risks to you, possibly including jail. Find a new attorney immediately.


More resources:

Frequently Asked Questions About Health Savings Accounts