The Internal Revenue Service plans to strengthen its controls over the accounting for the Premium Tax Credit, which helps subsidize health insurance premiums under the Affordable Care Act, after a government watchdog found discrepancies of $447 million.
A report from the Treasury Inspector General for Tax Administration found that controls over the financial accounting for fund outlays and disbursements associated with the PTC should be improved. Specifically, TIGTA found errors in the IRS financial accounting and reporting of PTC-related fund outlays.
The Patient Protection and Affordable Care Act created the Premium Tax Credit to help eligible individuals pay for their health insurance premiums. Rather than wait to claim the credit on their federal tax returns, individuals can elect to have the PTC paid directly to their health insurance issuers as a partial payment for their monthly premiums, referred to as the Advance Premium Tax Credit or APTC. In addition, as a refundable credit, the PTC is fully payable to the taxpayer even if the tax credit exceeds the tax liability.
To reconcile the PTC, the IRS needs to adjust the amounts initially recorded for Advanced Premium Tax Credit payments based on taxpayer estimated income and family size to the actual PTC amount based on income and number of dependent deductions reported on the taxpayer’s federal tax return. The errors identified by TIGTA were due to a programming miscalculation. But the miscalculation was not caught due to insufficient testing of the financial system programming developed to account for the impact of the reconciliation of PTC fund outlays (disbursements).
Due to this programing error, the IRS understated the amount of PTC disbursements and overstated the balance in the IRS PTC account by $447 million. The error that TIGTA identified in the financial accounting records, if left uncorrected, would have resulted in a misstatement of the fiscal year 2015 IRS financial statements refundable credits in excess of the tax liability account.
TIGTA determined that the key controls established over PTC accounting do not include the requirement for the periodic performance of a financial reconciliation of the IRS’s records and the APTC payment information (by the taxpayer) prepared and reported by the health insurance marketplaces.
TIGTA recommended the IRS’s chief financial officer, in coordination with the agency’s chief technology officer, develop procedures requiring the timely and comprehensive review and testing of any changes to the financial system programming used to report outlays related to the PTC. The report also suggested the CFO, in coordination with the IRS’s Affordable Care Act Office, should work with the Centers for Medicare and Medicaid Services to jointly develop procedures for the periodic financial reconciliation of APTC information.
In response to the report, IRS management agreed with TIGTA’s recommendations. The IRS plans to ensure that established test standards and guidelines are adhered to during financial systems testing. In addition, the IRS plans to perform periodic reconciliations of APTC payment information provided by the health insurance marketplaces to its financial records.