The Internal Revenue Service is hampered by incomplete information from health insurance marketplaces in its efforts to oversee tax breaks for individuals in the Affordable Care Act, according to a new government report.
The report, from the Government Accountability Office, found the IRS needs to strengthen its oversight of those tax provisions.
Incomplete and delayed marketplace data limited the IRS’s ability to match taxpayers’ claims for the premium tax credit with marketplace data at the time that tax returns were filed. Complete marketplace data for the 2014 coverage year was due to the IRS in January, but thanks to marketplace delays in transmitting the data and technical difficulties at the IRS with processing the data for matching, as of March 21, 2015, the IRS had complete data available for verification of taxpayer PTC claims for only four of the 51 marketplace states (that is, the 50 states and the District of Columbia).
The IRS does not know whether these challenges are going to be for a single year or an ongoing problem, the GAO noted. According to IRS officials, the IRS checks the formatting, but not the accuracy, of the data. Although the IRS implemented contingency plans to compensate for any missing and inaccurate data, those processes were more burdensome for taxpayers, according to the GAO.
Assessing whether the problems with the timeliness and reliability of the marketplace data are expected to be an ongoing challenge, rather than just a first-year problem, would help the IRS understand how it can use the data effectively and better target contingency plans, the GAO pointed out.
Tax year 2014 marked the first time individual taxpayers were required by the Patient Protection and Affordable Care Act to report health care coverage information on their tax returns. Taxpayers reported on whether they had health care coverage, had an exemption from the coverage requirement, or owed a tax penalty (known as the shared responsibility payment, or SRP).
Most taxpayers who received coverage through a health insurance marketplace were also eligible for an advance premium tax credit, or PTC, to make their coverage more affordable. Marketplace customers can choose to have the PTC paid in advance to their insurance company or they can claim all of the credit when they file their tax returns.
In January 2015, the IRS began verifying taxpayers' premium tax credit claims using marketplace data on enrollments and advance payments of the PTC. The IRS is using its standard examination processes to check the coverage, exemption or shared responsibility payment information that taxpayers report.
The IRS's overall goals are to efficiently and effectively enforce compliance with tax laws, reduce taxpayer burden, and encourage voluntary compliance.
The GAO noted that successful implementation of the premium tax credit and individual shared responsibility tax provisions requires the IRS to collaborate with the Centers for Medicare & Medicaid Services, also known as CMS—which is responsible for overseeing the marketplaces—and the marketplaces. The IRS also has to communicate with other stakeholders, such as tax software companies, employers and health insurers.
The IRS has worked to collaborate and communicate with external stakeholders to implement the requirements of the health care law for tax year 2014, the GAO acknowledged. However, several external stakeholders that the GAO spoke with reported challenges with the IRS collaboration efforts, such as not receiving certain IRS guidance in time for the stakeholders to have complete information at the beginning of the filing season.
The IRS is evaluating opportunities for improving return processing and the taxpayer experience, but is not evaluating its collaboration efforts, the GAO noted. Without an assessment of its efforts to collaborate and communicate with its key external stakeholders, challenges in implementing the 2014 PPACA requirements that relied on these groups could also affect new requirements taking effect in 2015, including new information reporting requirements for the state-based marketplaces, issuers of coverage, and applicable large employers.
The GAO recommended the IRS assess whether marketplace data delays are an ongoing problem, assess the reliability of the data for IRS matching, work with CMS to get complete data and track the aggregate gap between advance PTC paid and reported, and evaluate its collaboration efforts. The IRS generally agreed with the GAO’s recommendations.
“As you noted in your report, the implementation of these ACA provisions was a broad, complex and significant undertaking for IRS,” wrote IRS deputy commissioner for services and enforcement John M. Dalrymple in response to the report. “The IRS developed new systems, processes, tax forms, instructions and educational materials; and we worked closely and had ongoing collaborations with government and private sector stakeholders to facilitate implementation of these provisions.”
Dalrymple pointed out the IRS also had extensive outreach and coordination with the health insurance marketplaces, and it developed a strategic roadmap for implementing the ACA. However, he agreed with the GAO that it did not get all the needed information from the marketplaces.
“As you noted, the IRS did not receive all necessary data submissions from the Marketplaces prior to January 20, 2015, which was the start of the 2015 tax-filing season,” he wrote. “As a result, the IRS employed certain contingency plans it had developed in the event that partial data was received. These contingency plans included using Form 1095-A data as a secondary source of verification, corresponding with taxpayers when appropriate and using other available data to preform verification checks.”
Dalrymple said the IRS plans to analyze and evaluate filing behavior from the 2015 filing season to identify trends, patterns and taxpayer behavior associated with the new ACA provisions. “The results of our analysis and evaluations will be used to inform IRS compliance initiatives and taxpayer education efforts for the 2016 filing season and beyond.”
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