Small Business Health Care Tax Credit claims decline precipitously

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The Internal Revenue Service has been doing a better job of processing and reviewing claims for Small Business Health Care Tax Credits, according to a new report, though the number of small businesses claiming the Obamacare credit has declined precipitously.

The report, from the Treasury Inspector General for Tax Administration, noted that in March 2010, the year the Affordable Care Act was signed into law, it was estimated that claims for the credit would average $4 billion annually. That estimate was later revised downward to $1 billion annually for fiscal years 2016 through 2025 when small businesses did not seem to be taking advantage of the credit, which requires complex calculations. However, the actual dollar amount turned out to be even lower. Claims for the Small Business Health Care Tax Credit totaled approximately $519 million in tax year 2010, according to information obtained from IRS systems by TIGTA, and they declined to approximately $120 million as of tax year 2014. In 2010, the number of small businesses claiming the tax credit was 188,303, but by 2015, the number of taxpayers had plummeted to 14,001, claiming $56 million in tax credits.

Future claims of the credit could decline even further, TIGTA noted. Starting in tax year 2014 and beyond, employers can only claim the credit for two consecutive years.

On top of that, although not noted in the report, congressional Republicans are in the process of trying to repeal Obamacare, at the urging of the Trump administration.

Even though relatively few small businesses are claiming the tax credit, the IRS is getting better at processing it. Systemic controls have enabled the IRS to identify errors or questionable issues related to the Small Business Health Care Tax Credit. But some of the IRS’s post-processing filters are still not working as intended, increasing the risk that unnecessary examinations may be conducted on small businesses, wasting IRS resources and increasing the burden on taxpayers.

From tax years 2011 through 2014, the IRS identified more than 41,500 tax returns that required further review and potential correction of the tax credit. But the number of tax credits erroneously allowed by the IRS has decreased.

TIGTA recommended the IRS review its post-processing filters to identify any potentially questionable issues related to the credit and correct any programming issues when those errors are identified. In response to the report, the IRS management agreed with TIGTA’s recommendation and plans to analyze each filter to find out if it’s performing as intended and make corrections where necessary. The IRS also intends to continue monitoring the filters to see if further corrections are needed.

“We agree with your recommendation and will refine the post-processing filters to identify Small Business/Self-Employed returns with the highest risk of material non-compliance related to the Internal Revenue Code Section 45R credit,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report.

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