TIGTA critical of IRS handling of premium tax credit claims; recommends improvements
TIGTA critical of IRS handling of premium tax credit claims; recommends improvements
A report by the Treasury Inspector General for Tax Administration (TIGTA) concludes that IRS’s preparations for verifying the accuracy of premium tax credit (PTC) claims during the 2015 Filing Season fell short of the mark. It recommends that IRS revise the way it verifies PTC claims and suggests ways to better identify certain erroneous PTC claims.
Premium tax credit and advance premium tax credit. The Affordable Care Act (ACA) created Health Insurance Marketplaces, also known as Exchanges, which are where individuals find information about health insurance options, purchase qualified health plans, and, if eligible, obtain help paying premiums. The ACA also created a new refundable tax credit, the PTC, to assist eligible taxpayers with paying their health insurance premiums. When enrolling in a qualified health plan through an Exchange, eligible individuals can choose to have some or all of the PTC paid in advance to their insurance company as payment of their monthly premium — the Advance Premium Tax Credit (APTC) — or can wait to claim all of the PTC on their tax return.
The Exchanges have sole responsibility for determining if an individual is eligible to purchase health insurance through an Exchange as well as determining the amount of the APTC they are eligible to receive. The Exchanges use a combination of Federal and State data sources to determine eligibility. Almost $11 billion in APTCs was paid to insurers in fiscal year 2014.
Reconciliation of PTC and APTC. All individuals for which APTC payments were made to an insurer must file a tax return to reconcile the APTC with the actual PTC they are entitled to receive based on the income and family size reported on their tax return. This reconciliation is necessary as the Exchange’s computation of the APTC is based on estimates of an individual’s anticipated income and family size for the upcoming calendar year. The actual amount of the PTC that taxpayers are entitled to receive is based on their actual income and family size reported on their annual tax return, which can be different from the estimates used by the Exchange to determine the allowable APTC.
Beginning in January 2015, taxpayers who purchased insurance through an Exchange are required to include Form 8962, Premium Tax Credit (PTC), with their tax return to claim the PTC and reconcile any APTC payments that were made to an insurer on their behalf. Taxpayers who are entitled to more PTC than was received in advance receive the additional credit as a refund on their tax return. Those who received more PTC in advanced payments than they were entitled to must repay the excess, subject to certain limits, when filing their tax return.
For those individuals who are assessed additional tax resulting from an overpayment, the ACA limits the amount of tax that individuals with income between 100% and 400% of the Federal Poverty Line (FPL) will have to repay. However, individuals whose actual income exceeds 400% of the FPL are not eligible to receive the PTC and are required to repay the full amount of any APTC they received.
Exchange Periodic Data (EPD) and health insurance statements. The Exchanges must provide IRS with information regarding individuals who are enrolled by the Exchange on a monthly basis. This data is referred to as the EPD. In addition, Exchanges also must provide an annual summary to both IRS and the individual, that details specific information relating to the individual’s enrollment. This summary is provided via Form 1095-A, Health Insurance Marketplace Statement.
What TIGTA found about verifying PTC claims at filing. TIGTA determined that there were delays in receiving EPD. These delays increased the risk of not detecting erroneous PTC claims at the time tax returns are processed. TIGTA found that IRS did not receive all required enrollment data from the Exchanges before the Jan. 20, 2015, start of the 2015 Filing Season. For example, the Centers for Medicare and Medicaid Services indicated that it would not send approximately 1.7 million (40%) of the approximately 4.2 million Federal Exchange enrollment records to IRS until mid February. In addition, six of the 15 State Exchanges (including the District of Columbia) did not provide enrollment data to IRS by Jan. 20, 2015.
IRS indicated that data from four of the six State Exchanges would be provided in mid February but could not provide a time frame for when the remaining two State Exchanges would provide the required enrollment data.
In response to the delays in receiving required EPD submissions, IRS developed contingency plans in an effort to improve its ability to ensure the accuracy of PTC claims. However, without the required enrollment data from the Exchanges, TIGTA said IRS will be unable to ensure that all taxpayers claiming the PTC bought insurance through an Exchange as required.
TIGTA recommendation and IRS’s response. In the fall of 2014, IRS management decided to not complete a programming update to use Form 1095-A data as they become available to verify PTC claims at filing and instead chose to rely solely on the EPD to verify PTC claims at filing. TIGTA recommends that IRS revise computer programming business requirements to use Forms 1095-A in conjunction with monthly data provided by the Exchanges to verify claims for the PTC.
IRS did not agree to revise computer programming to use Forms 1095-A in conjunction with monthly data. It said the EPD contains the same plus additional information that is not reported on Forms 1095-A, and that EPD are available earlier than the Form 1095-A data, which allows the data to be available in the return processing systems at the start of the filing season. During the processing of tax returns, IRS uses Form 1095-A data as a secondary source in conjunction with the EPD. In addition, to mitigate any delay in receipt of the EPD, IRS developed and implemented a strategy that included contingency plans to ensure the accuracy of PTC claims and to prevent erroneous refunds from being paid. IRS contingency plans include contacting the taxpayer to obtain additional information when IRS cannot determine whether the taxpayer enrolled in a qualified health plan (QHP) at the Exchange.
What TIGTA found about erroneous APTC received during enrollment process. During the enrollment process, the Exchanges are responsible for verifying eligibility requirements to obtain a QHP through the Exchange and receive the APTC. The ACA allows individuals 90 days to provide supporting information to the Exchange when the Exchange is unable to verify that the individual met enrollment and/or APTC requirements. Individuals whose attested information qualifies them to receive the APTC are considered conditionally eligible and can receive APTC payments during this 90-day inconsistency period. At the end of the 90-day inconsistency period, the Exchange is to make a final determination as to an individual’s eligibility to use the Exchange to purchase a QHP and/or receive the APTC.
TIGTA’s review of the Internal Revenue Code and the Department of Health and Human Services regs found that the guidance does not fully address repayment of the APTC received during the months in which an enrollment inconsistency is being resolved if the individual is ultimately determined to not qualify for insurance through the Exchange. Such individuals are not entitled to the PTC. Furthermore, procedures have not been established for the Exchanges to notify IRS when an individual is determined to be ineligible subsequent to enrollment.
TIGTA’s recommendation and IRS’s response. TIGTA recommended that the Director, Affordable Care Act Office, should work with the Exchanges to determine when certain individuals are determined to be ineligible subsequent to enrollment.
IRS partially agreed with this recommendation. It provided instructions to the Exchanges for reporting EPD and Form 1095-A data when an individual who received the APTC is subsequently determined not to qualify for insurance through the Exchange and is therefore not entitled to the PTC. IRS will review and update, as appropriate, current instructions for the recipients of Form 1095-A, instructions for Form 8962, Publication 974, Premium Tax Credit (PTC), and IRS.gov to clarify the reconciliation requirements.
Additional compliance tools needed to prevent payment of erroneous PTC claims. The ACA included a number of provisions that, once adhered to and implemented, will provide IRS with the information it needs to effectively identify erroneous PTC claims at the time tax returns are processed. However, TIGTA says that even though IRS will have the data it needs to identify erroneous claims moving forward, it does not have the tools it needs to effectively prevent PTC claims from being paid.
IRS can use existing math error authority and electronic filing reject processes to adjust PTC claims when individuals do not provide certain required information (e.g., an individual who received an APTC fails to attach Form 8962 to his return) or when a mathematical error on the tax return affects the accuracy of the claim. However, the ACA did not grant IRS the authority to systemically adjust a PTC claim when the claim is not supported by Exchange data (e.g., the Exchange data show the individual did not use the Exchange to purchase insurance). As such, IRS must audit PTC claims that are not supported by Exchange data before it can adjust the claim. The number of PTC claims IRS can examine is limited to available resources, TIGTA says. IRS’s Examination function plan contains 36,000 PTC audits. In addition, IRS plans to review approximately 75,000 PTC tax returns in the Automated Questionable Credits program for Fiscal Year 2015. IRS management indicated these numbers will continually be evaluated as returns are selected for treatment and may be increased or decreased as needed.
TIGTA says IRS has asked for legislative authority to disallow tax benefit claims when reliable third-party data indicate the claim is erroneous. This authority would enable IRS to more effectively and efficiently identify and prevent the issuance of erroneous PTC claims before tax refunds are issued by allowing IRS to systemically deny all PTC claims for which Exchange data show the claim is erroneous.
References: For the premium tax credit, see FTC 2d/FIN ¶ A-4241; United States Tax Reporter ¶ 36B4; TaxDesk ¶ 138,700; TG ¶ 1381.