On April 7 and April 10, the Treasury Inspector General for Tax Administration (TIGTA) released two reports on Affordable Care Act programs.
Individual Tax Returns
The April 7 report contains interim results on tax filings for the 2016 filing season through March 31, 2017. As of that date, over 61 million tax returns had been filed with the IRS; about 8.5 percent fewer than at the same time in 2016.
Approximately 1.7 million returns reported the receipt of about $6.4 billion in advance premium tax credits. Nearly 650,000 taxpayers claimed that they had not received all premium tax credits to which they were entitled in advance and claimed an additional $300 million in premium tax credits. About 956,000 taxpayers reported receiving $829 million in excess credits, a little over $564 million of which was below the caps the ACA places on repayment obligations for low-income taxpayers and will need to be repaid. Nearly 63,000 predicted their 2016 income accurately.
Approximately 44 million taxpayers reported that they had insurance coverage throughout the entire year and were thus in full compliance with the individual responsibility requirement. Nearly 5.3 million taxpayers filed returns claiming a personal responsibility exemption for at least one household member. About 1.8 million taxpayers reported owing the individual responsibility penalty and paid about $1.2 billion in penalties with their filings.
The number of individuals claiming an exemption was down 12 percent while the number paying the penalty was down 33.3 percent from 2015; from 2.7 to 1.8 million. Because the penalty increased for 2016 (from the greater of $325 per adult taxpayer or 2 percent of income above the filing limit to $695 or 2.5 percent), the total penalties paid increased 20 percent. It is not immediately clear what impact the confusion as to whether the Trump administration would collect the penalty might have had on compliance; contributing to this confusion was an IRS decision not to implement for 2017 a planned program it to reject “silent” returns that did not claim coverage or an exemption or pay the penalty.
Employer Tax Returns
The April 10 report reviewed the IRS processing of employer responsibility reporting requirements for 2015. The ACA’s employer responsibility provision requires large employers (with more than 50 full-time equivalent employees), to offer minimum essential coverage to their full-time employees or pay a penalty of about $2,000 for each full-time employee if any full-time employee claims premium tax credits. A second, higher, per-employee penalty of about $3,000 applies for each full-time employee who receives premium tax credits if an employer does not offer the employee adequate and affordable coverage, as defined in the ACA.
The employer responsibility penalty and reporting requirements were to take effect for 2014 but the administration delayed them for a year. The reporting requirements did go into effect for 2015, but subject to a number of transitional rules the administration created to ease the burden of the requirement for the first year.
Employers subject to the requirement must file with the IRS a form 1095-C for each of their full-time employees, identifying the employer and including the employee’s name, social security number, the type of coverage offered the employee by month, and the months of coverage for the employee and each of the employee’s dependents if the employer is self-insured. These reports must also be given to the employees. Each employer subject to the requirement must also file with the IRS a form 1094-C transmittal form summarizing the information in the 1095-Cs. Employers filing 250 or more informational returns in a year must file electronically. Smaller employers may file paper returns. The IRS is responsible for calculating the amount of penalty owed and assessing the penalty.
As of October 28, 2016, the IRS had processed about 440,000 1094-B forms and 110 million 1095-C forms for 2015. About 65,000 of the 1094-C forms and 4.6 million of the 1095-C forms were received on paper. The TIGTA report documents major problems with the processing of these paper forms. They were supposed to be scanned at one IRS center and then transmitted electronically to another center for processing. The report did not address the assessment and payment of the penalties.
The IRS encountered major delays and technical problems with this process. As of the end of July, 2016, 99 percent of the paper forms had not been processed. Only as of December 23, 2016 were all processed. Part of the delay was due to the IRS interrupting the processing of the paper returns from mid-March until the beginning of May to redirect resources to more important needs. The TIGTA also determined that errors in scanning the paper forms resulted in missing data in 20 percent of the small sample of forms it reviewed. It further concluded that the IRS incorrectly identified a number of employers as large employers that in fact were not.
The TIGTA identified numerous problems with the processing of information from the filings. These included error codes that were generated when no errors were present and error codes that were not generated when errors in fact were present. Employers were in some instances asked to correct errors where none existed, which in turn burdened IRS staff with unnecessary inquiries.
Filings with certain types of errors were rejected as planned, but a plan to also reject forms with minor errors that exceeded a certain threshold was not implemented. When filings were rejected for errors, the error that caused the rejection was not always identified. A filing containing several employer identification number and many employee Social Security numbers might be rejected for an incorrect taxpayer identification number with no indication which TIN was erroneous. Management reports monitoring volumes and types of errors were also found to be inaccurate.
The TIGTA offered seven recommendations to the IRS to improve management practices. The IRS agreed with all but one of these recommendations. Indeed, the IRS had already acted to address most of the problems reported. The IRS is also developing a system for identifying employers that are not complying with the employer responsibility requirement, which it had hoped to deploy by March of 2017. The IRS cancelled a case management program it was developing for managing and tracking the status of employer responsibility payment cases after spending $7 million on its development and now hopes to handle these cases through an IRS-wide enterprise case management system.
The IRS has obviously been experiencing growing pains in implementing a very complex requirement involving millions of filings. It remains to be seen whether it will work out all the kinks while the requirement is still on the books.