IRS enforcement of ACA employer mandate had glitches

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Some processes used by the Internal Revenue Service to ensure businesses comply with the Affordable Care Act’s employer shared responsibility provision didn’t work as they were supposed to, or they were delayed or canceled, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, found that as of Oct. 28, 2016, the IRS had processed 439,201 Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and nearly 110 million Forms 1095-C, Employer-Provided Health Insurance Offer and Coverage. However, thanks to system errors, the IRS couldn’t process the paper information returns on a timely and accurate basis. As of the same date, nearly five months after the May 31 filing deadline, the IRS estimated that more than 16,000 paper Forms 1094-C and 1.4 million paper Forms 1095-C had not been processed.

In addition, TIGTA found the criteria for identifying validation errors in the submissions didn’t always work as intended. For example, the systems wrongly generated error codes when there was no error condition, and the error codes didn’t generate when an error condition had actually occurred. Some of the error codes didn’t function as intended because the IRS did not sufficiently test its error code programming.

Development and implementation of the main systems for identifying noncompliant employers who would be subject to an Employer Shared Responsibility Payment have been delayed, uninitiated or canceled. Because of that, the IRS now needs to develop automated tools outside the main systems in order to identify noncompliant employers and rely on other interim solutions to control and manage their activities.

“Information from the Forms 1094-C and 1095-C is needed by the IRS to verify the accuracy of reported health insurance offers of coverage and for calculating the Employer Shared Responsibility Payment,” said TIGTA Inspector General J. Russell George in a statement. "Thus, it is essential that this information is timely and accurately processed.”

TIGTA made seven recommendations to the IRS to improve the processing of Forms 1094-C and 1095-C. IRS managers agreed with six of the seven recommendations, but didn’t agree it should set a timeframe for employers to fix errors identified on Forms 1094-C and 1095-C. Instead the IRS may reevaluate the need for additional written guidance in the future.

“Like the implementation of most new and significant legislation, the implementation of these ACA provisions was a broad, complex and substantial undertaking for the IRS, a process that required the development of new information technology systems, processes, tax forms, instructions, educational materials, training, outreach, etc.,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report.

She acknowledged that the IRS experienced some errors in processing 2015 information returns. “Given the volume of the data that was being received and the relative newness of the system developed to receive it, issues such as these are part of the progressive process by which significant legislation is implemented—requiring continual adaptations on the IRS side, and transition relief on the taxpayer side,” she added. “We have taken corrective action to mitigate these errors prior to receiving the TY2016 information returns.”

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