Improper Payments: Improvements Needed in CMS and IRS Controls over Health Insurance Premium Tax Credit
Released: 2017-07-13T00:00:00

Letter

Background

CMS Marketplace Responsibilities for Advance PTC Payments

Under PPACA, health care marketplaces are the mechanisms through which applicants enroll in qualified health plans and apply for income- based advance PTC payments (paid directly to issuers) to offset the cost of these plans. As applicable, they also obtain eligibility determinations for other health coverage programs, such as Medicaid or the Children’s Health Insurance Program (CHIP). CMS is responsible for overseeing the establishment of state-based marketplaces and operating the FFM for states that did not establish their own marketplaces. Applicants in these states enroll in qualified health plans through the FFM. CMS operates the FFM in about two-thirds of the states. Specifically, CMS oversees implementation of certain PPACA provisions related to the FFM, including ensuring that individuals are eligible to receive health insurance coverage through the FFM and determining the amount of any advance PTC they are eligible to receive.

To be eligible to enroll in a qualified health plan offered through a marketplace, applicants must be U.S. citizens or nationals, or otherwise lawfully present in the United States; reside in the marketplace service area; and not be incarcerated (unless incarcerated while awaiting disposition of charges). Marketplaces are required by law to verify certain application information to determine applicant eligibility for enrollment and, if applicable, advance PTC. The verification steps include validating applicant Social Security numbers, if provided; verifying citizenship or lawful presence status, and verifying household income.

PPACA requires that applicant-submitted information be verified and that determinations of eligibility be made through either an electronic verification system or another HHS-approved method. To implement this verification process, CMS developed its Data Services Hub, which acts as a conduit for exchanging information between (1) the FFM; state-based marketplaces; Medicaid agencies; and other federal, state, and commercial entities and (2) CMS’s external partners, including IRS, the Social Security Administration (SSA), and other federal agencies. The FFM accesses this information through the Data Services Hub to verify that applicant information necessary to support an eligibility determination is consistent with external data sources.

CMS generates an “inconsistency” when applicant-submitted information does not match information from trusted data sources—either because information an applicant provided does not match information contained in the data sources or because such information is not available. Inconsistencies are also created whenever the FFM is unable to solicit information from trusted data sources due to data element requirements. As required by federal regulations, when there are inconsistencies, the marketplace grants temporary eligibility using applicant attestations and ensures that advance PTC is provided to issuers on behalf of the applicants qualified to receive them while such inconsistencies are being resolved. Also, under this marketplace process, applicants are asked to provide additional information or documentation for the marketplaces to review to resolve the inconsistencies. When applicants are unable to resolve the inconsistencies within the resolution period, the marketplace may terminate advance PTC and coverage in certain circumstances.

Marketplaces are required to provide Form 1095-A, Health Insurance Marketplace Statement, to recipients enrolled in qualified health plans through the marketplace and to IRS. This form includes information on covered enrollees, coverage periods, monthly premiums, and amounts of advance PTC paid to issuers on behalf of the enrollees. Enrollees are instructed to use Form 1095-A information to prepare Form 8962, Premium Tax Credit, for their federal income tax returns.

Treasury regulations require marketplaces to report detailed information for each qualified health plan to IRS monthly, by the 15th day after each month of health insurance coverage. This monthly transmission—the Exchange Periodic Data (EPD) transmission—contains cumulative coverage information for the year, starting in January; thus, the EPD transmission due to IRS by January 15 should contain complete marketplace data for the entire previous coverage year. The EPD transmission is also required to include information on any exemptions from coverage requirements that are granted by the marketplace.

CMS is responsible for performing certain oversight functions intended to help ensure that the plans offered through the FFM meet certification standards. These oversight functions are intended to verify that enrollees receive appropriate health insurance coverage and that federal funds are not provided to health plans and issuers that do not meet the certification standards. When plans no longer meet certification standards, CMS may decertify them.

Each month, CMS is also responsible for calculating, processing, and authorizing aggregated advance PTC payments to issuers on behalf of eligible enrollees, along with cost-sharing reduction subsidies and collecting user fees from issuers in certain states. For enrollees determined eligible for advance PTC, the marketplace determines the advance PTC amounts using, among other things, enrollee-reported incomes and family sizes.

IRS Responsibilities Related to PTC

IRS is responsible for determining the final amounts of PTC that taxpayers are entitled to receive based on household incomes and family sizes reported on their tax returns. Taxpayers are eligible for PTC if they meet various criteria: (1) buy qualified health insurance through a marketplace; (2) are ineligible for affordable, minimum-value coverage through an employer or government plan; (3) are within certain income limits (household income from 100 percent to 400 percent of the federal poverty level); (4) do not file a tax return with the status of married filing separately; and (5) cannot be claimed as a dependent by another person. While marketplaces determine the amounts of advance PTC for which individuals are eligible based on their anticipated family sizes and household incomes for the year reported to the marketplace, the final PTC amounts are based on actual incomes reported when those individuals file their federal income tax returns. As shown in figure 1, taxpayers use Form 1095-A, provided by marketplaces, and their actual modified adjusted gross incomes and family sizes to calculate their actual PTC amounts on Form 8962.

Form 8962 is the key form that IRS uses to determine and recover advance PTC overpayments and reimburse underpayments to individuals. When the claimed amounts are greater than the total advance PTC paid to issuers on behalf of individuals, those individuals report net PTC on their federal income tax returns (e.g., Form 1040, Individual Income Tax Return). The net PTC can increase refund amounts that taxpayers receive or reduce amounts due from taxpayers. When the claimed amounts are less than the total advance PTC paid to issuers on behalf of individuals, those individuals report the excess advance PTC on their federal income tax returns (e.g., Form 1040) as an increase in tax, subject to limitations on the increase. The excess advance PTC can reduce refund amounts that taxpayers receive or increase the amounts due from taxpayers. Taxpayers are responsible for submitting their federal income tax returns to IRS for processing with an attached Form 8962.

IRS is responsible for processing tax returns to determine the final amount of PTC to which taxpayers are entitled and recovering advance PTC overpayments. When IRS receives tax returns, IRS checks them for completeness and attempts to verify taxpayer identities and PTC eligibility. To verify PTC claims on federal income tax returns, IRS relies on marketplace data to confirm that taxpayers were enrolled in qualified health plans. As illustrated in figure 2, at the time of filing (i.e., before refunds are issued), IRS’s Affordable Care Act Verification Service (AVS) system compares the information taxpayers reported on their tax returns to information furnished by the marketplaces, potentially identifying math errors or discrepancies with marketplace data. For example, AVS may identify taxpayers who received advance PTC according to the marketplaces, but did not report it on their tax returns through Form 8962. AVS may also detect cases when taxpayers claim the PTC on Form 8962 but are ineligible because they were not enrolled in a marketplace plan. When discrepancies are identified, IRS may correspond with taxpayers to address the related issues, or IRS may correct certain mathematical or clerical errors on tax returns and notify taxpayers of the proper tax liabilities based on those corrections. If IRS is unable to resolve such discrepancies through correspondence with taxpayers or through its math error authority, it may refer cases to examination for further review.

Improper Payment Reporting Requirements

IPIA defines an improper payment as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. It includes duplicate payments; any payment made for an ineligible recipient, an ineligible good or service, or a good or service not received; or any payment that does not account for credit for applicable discounts. OMB guidance also instructs agencies to treat any payments for which insufficient or no documentation is found as improper payments.

IPIA also defines the scope of payments subject to assessment, estimation, and reporting. Specifically, a payment is defined as any transfer or commitment for future transfer of federal funds—such as cash, securities, loans, loan guarantees, and insurance subsidies—to any nonfederal person or entity that is made by a federal agency, a federal contractor, a federal grantee, or a governmental or other organization administering a federal program or activity. IRS has historically estimated improper payments for the Earned Income Tax Credit but not for other refundable credits.

IPIA and OMB guidance together provide the specific requirements for assessing, estimating, and reporting on improper payments. Federal agencies are required to review all programs and activities that they administer and identify any program or activity that may be susceptible to significant improper payments. IPIA defines “significant improper payments” as gross annual improper payments (i.e., the total amount of overpayments and underpayments) that may have exceeded (1) both 1.5 percent of program outlays and $10 million of all program or activity payments made during the fiscal year reported or (2) $100 million (regardless of the improper payment percentage of total program outlays). Agencies must institute a systematic method of reviewing and assessing their programs, which may take the form of either through a quantitative analysis based on a statistical sample or qualitative evaluation.

OMB guidance requires that agencies take into account the following nine risk factors that are likely to contribute to significant improper payments: 1. whether the program or activity reviewed is new to the agency; 2. the complexity of the program or activity reviewed, particularly with respect to determining correct payment amounts; 3. the volume of payments made annually; 4. whether payments or payment eligibility decisions are made outside of the agency, for example, by a state or local government or a regional federal office; 5. recent major changes in program funding, authorities, practices, or 6. the level, experience, and quality of training for personnel responsible for making program eligibility determinations or certifying that payments are accurate; 7. inherent risks of improper payments because of the nature of agency 8. significant deficiencies in the agency’s audit reports, including but not limited to the agency inspector general or GAO audit findings or other relevant management findings that might hinder accurate payment certification; and 9. results from prior improper payment work.

OMB guidance describes these risk factors as the minimum that agencies should consider. An agency’s assessment may include other risk factors, as appropriate, specific to the program or activity being assessed.

IPIA requires agencies to assess the risk of improper payments for each program and activity that they administer, at least once every 3 years for programs and activities deemed not susceptible to significant improper payments. If an agency finds that a program is susceptible to significant improper payments, the agency is required to estimate the annual amount of improper payments for the program, publish corrective action plans, set reduction targets, and annually report on the results of addressing these requirements for that program.

OMB established an interagency working group, which included officials from Treasury, IRS, HHS, and CMS, to help agencies navigate OMB improper payments guidance. The interagency working group concluded that CMS would be responsible for assessing risks and developing improper payment error rates for advance PTC payments and that IRS would be responsible for assessing risk and developing improper payment error rates for net PTC in tax return processing.

CMS and IRS Did Not Take All Required Actions to Assess, Estimate, and Report PTC-Related Improper Payments

In fiscal year 2016, neither CMS nor IRS took all required actions for assessing, estimating, and reporting improper payments related to PTC. CMS assessed its advance PTC program as susceptible to significant improper payments by appropriately considering each of OMB guidance’s nine qualitative risk factors; however, it did not complete other key IPIA requirements for programs deemed susceptible to significant improper payments for its advance PTC program. IRS did not assess its PTC program’s susceptibility to significant improper payments in a manner consistent with IPIA requirements.

CMS Assessed Its PTC Program as Susceptible to Significant Improper Payments but Has Not Estimated or Reported Amounts as Required

In fiscal year 2016, CMS concluded that its advance PTC program was susceptible to significant improper payments. We determined that CMS instituted a systematic, qualitative method for assessing risk that was consistent with IPIA requirements and OMB guidance. CMS appropriately assessed each of the nine risk factors required by OMB guidance. For example, CMS considered the risk factor regarding whether a program is new to the agency and rated the advance PTC program, which started in 2014, as high risk. CMS also appropriately tailored risk factors to its advance PTC program. For example, in considering the risk factor regarding recent changes in program operations and funding, CMS also considered projected future changes in program operations and funding that could affect improper payments for the program. The analysis that CMS performed on the risk factors supported its conclusion that the advance PTC program was susceptible to significant improper payments, as defined by IPIA and OMB guidance.

Although CMS reviewed its advance PTC program and concluded that it was susceptible to significant improper payments, it did not complete other key IPIA requirements for programs deemed susceptible to significant improper payments for its advance PTC program. Specifically, CMS did not estimate or report the annual amount of improper payments for the advance PTC program. According to the fiscal year 2016 HHS agency financial report, CMS was unable to specify the year that the rate and the improper payment estimate amount will be reported. Further, CMS officials could not provide us with a specific date when they expected to be in compliance with these IPIA requirements. CMS officials told us that they will not report improper payment estimates in fiscal year 2017 and may not be able to report estimates until at least fiscal year 2022. According to the fiscal year 2016 HHS agency financial report, the agency is unable to specify the year that it will report the improper payment rate and amount because of the complexity of the improper payment error rate measurement methodology development process. This process involves conducting pilot testing, using those tests to refine the methodology, and then undergoing the rule-making process before implementing the methodology. However, the fiscal year 2016 HHS agency financial report did not disclose a timeline for completion of the key steps necessary for developing the improper payment methodology or why challenges will result in delays in meeting IPIA requirements for estimating and reporting improper payments.

According to internal control standards, management should externally communicate the necessary quality information to achieve the entity’s objectives. This involves communicating with external parties—such as legislators, oversight bodies, and the general public—using established reporting lines. Information communicated to oversight bodies includes significant matters relating to risks, changes, or issues that affect the entity’s internal controls for achieving compliance and reporting objectives. This communication is necessary for the effective oversight of internal control.

Because CMS does not plan to report improper payment estimates for this program for several years, HHS’s overall improper payment estimate will continue to be understated, and CMS may be hindered in its efforts to reduce improper payments in this program. Additionally, Congress and other external stakeholders will continue to lack key payment integrity information for monitoring improper payments. Likewise, if CMS does not communicate significant matters relating to IPIA estimation, compliance, and reporting objectives for the advance PTC program; its progress and timeline for achieving those objectives; and the basis for its timeline for reporting improper payment estimates, legislators’, oversight bodies’, and the general public’s expectations for CMS improper payments reporting may not align with those set by CMS management.

IRS Did Not Determine Whether Its PTC Program Is Susceptible to Significant Improper Payments

In its fiscal year 2016 improper payments susceptibility assessment, IRS did not assess the PTC program’s susceptibility to significant improper payments in a manner consistent with IPIA requirements. IPIA and OMB guidance require agencies to identify all programs and activities that may be susceptible to significant improper payments. OMB guidance further instructs agencies not to put programs or activities into groupings that may mask significant improper payment rates by the scope of a grouping. However, IRS did not consider key types of PTC-related errors that may result in improper payments within the scope of its assessment. IRS focused its assessment on payment errors for taxpayers who reported a net PTC amount on their tax returns—that is, individuals who reported a final PTC amount that was greater than the advance PTC amounts they reported on their tax returns. IRS did not assess payment errors for taxpayers who (1) reported final PTC amounts equal to the advance PTC amounts they reported on their tax returns or (2) reported an excess advance PTC—that is, advance PTC amounts that exceeded the final PTC amounts they reported on their tax returns. Such errors fall under the purview of IRS controls and can affect the accuracy of net PTC payments and tax collections of excess advance PTC.

IRS officials told us that errors resulting in (1) final PTC claims equal to advance PTC and (2) excess advance PTC, which increase taxes owed, do not affect program outlays or improper payments. As a result, IRS maintains that these types of errors are not covered by IPIA. However, IPIA defines improper payments to include both overpayments and underpayments.

Although we agree that excess advance PTC increases taxes owed, taxpayers may inaccurately complete Form 8962 and erroneously report excess advance PTC on their returns instead of claiming net PTC, or they may simply fail to report net PTC on their tax returns altogether. Such errors would result in underpayments of net PTC and therefore affect program outlays and improper payments. These error types were not considered within the scope of the IRS susceptibility assessment for improper payments.

Likewise, IRS did not conclude on whether the PTC program is or is not susceptible to significant improper payments. Instead, IRS concluded that the risk of improper payments in the net PTC program was “medium.” The assessment defined a “medium” risk level as one that is partially mitigated by current mitigation measures and internal controls (see fig. 3). IRS’s fiscal year 2016 IPIA susceptibility assessment for the net PTC was prepared by a contractor under the direction and oversight of IRS management. IRS management allowed the contractor to use a risk level definition that was inconclusive for purposes of assessing whether or not the program may be susceptible to significant improper payment thresholds, as defined by IPIA.

Although IRS used all of the required qualitative risk factors specified in IPIA and OMB guidance within its assessment, IRS did not analyze how each of the risk factors affected the susceptibility of the program to significant improper payments, as defined by IPIA. For example, rather than analyzing whether the volume of PTC payments made was likely to cause the program to meet applicable IPIA thresholds for susceptibility to significant improper payments, IRS compared the projected total number of taxpayers who are able to claim net PTC on their federal income tax returns to the total number of taxpayers filing federal income tax returns as a whole during the 2015 filing season. Such a comparison is not relevant to assessing whether the program’s error rates or improper payment amounts may have exceeded the applicable thresholds for susceptibility: either (1) 1.5 percent of program outlays and $10 million or (2) $100 million.

Internal control standards state that management should use quality information to achieve the entity’s objectives. Management obtains relevant data from reliable internal and external sources in a timely manner based on the identified information requirements. Relevant data have a logical connection with, or bearing upon, the identified information requirements. Reliable internal and external sources provide data that are reasonably free from error and bias and faithfully represent what they purport to represent.

By not considering certain types of underpayments or concluding whether its PTC program is susceptible to significant improper payments, IRS did not demonstrate whether the program met applicable thresholds for susceptibility to significant improper payments. Until IRS conducts an appropriate assessment, it will continue to be uncertain whether IRS should estimate the amount of improper PTC payments.

CMS Control Activities Related to Preventing and Detecting Improper Payments of Advance PTC Were Not Properly Designed

CMS control activities were not properly designed and implemented to help achieve management objectives related to preventing and detecting improper payments of advance PTC. Specifically, we identified deficiencies in the design of key CMS control activities related to eligibility requirements for advance PTC payments and the accuracy of advance PTC calculations based on incomes and family sizes.

As shown in figure 4, we found that CMS control activities related to determining the accuracy of PTC payments to certified issuers of qualified health plans were properly designed and implemented. However, we did not evaluate whether all control activities related to preventing and detecting improper payments of advance PTC were operating as designed or evaluate other internal control components, such as the control environment. Deficiencies, if any, in the internal control components that were not evaluated could impair the overall effectiveness of CMS’s control activities related to preventing and detecting improper payments in the advance PTC program.

Most CMS Control Activities Related to Key Eligibility Requirements for Advance PTC Were Not Properly Designed

CMS did not properly design control activities related to individuals meeting key eligibility requirements for receiving advance PTC. While CMS’s procedures related to verifying citizenship and lawful presence of individuals with Social Security Administration (SSA) and the Department of Homeland Security (DHS) were properly designed and implemented and were operating as designed, CMS procedures to verify other key eligibility requirements were not properly designed.

Verifying Citizenship and Lawful Presence

To be eligible to enroll in a qualified health plan offered through a marketplace, an individual must be a U.S. citizen or national, or otherwise lawfully present in the United States. For verifying citizenship or lawful presence of individuals, CMS relies on data in SSA and DHS information systems. According to CMS’s control activities for citizenship, CMS queries an SSA system to validate, among other things, whether an individual is a U.S. citizen. If the SSA system cannot verify citizenship, and the individual has provided an immigration document number that indicates possible citizenship or lawful presence, CMS queries a DHS system to verify the individual’s citizenship or other immigration status. We tested a statistical sample of 93 enrollment applications submitted during the 2016 open enrollment period and found that CMS verified citizenship and lawful presence with SSA or DHS for all applications. Based on our audit work, CMS control activities for verifying citizenship and lawful presence of individuals with SSA or DHS were properly designed and implemented and were operating as designed.

Verifying the Identities of Individuals

An individual begins the marketplace enrollment process in a qualified health plan by providing basic personal information, such as name, birth date, and Social Security number. To prevent unauthorized individuals from creating marketplace accounts using the identities of others when applying for health coverage, CMS verifies some individual identities through an identity proofing process. According to CMS’s internal control documentation, for individuals applying for marketplace coverage online via HealthCare.gov, CMS validates their identities through an external source.

CMS does not perform identity proofing for individuals applying for health coverage through the mail or over the phone. For paper applications submitted by mail, the marketplace requires individual signatures before the marketplace processes those applications. For phone applications, CMS does not validate identities of individuals, instead relying solely on the basis of verbal attestations made by individuals. CMS allows individuals to complete the application process on the basis of these attestations, given under penalty of perjury.

According to CMS officials, PPACA does not require CMS to validate identities of individuals. However, internal control standards state that management should consider the potential for fraud when identifying, analyzing, and responding to risks and design and implement control activities to respond to risks. Further, these standards also state that management should design control activities to achieve objectives and respond to risks.

Because CMS does not validate the identities of individuals who apply by phone or mail, CMS is vulnerable to enrolling ineligible individuals in qualified health plans with advance PTC. To illustrate, we previously reported on our undercover testing of CMS enrollment processes in 2014, in which we made six online applications using fictitious identities that failed to clear an identity validation step. We subsequently were able to obtain coverage for all six of these applications that we began online by completing them by phone. By following instructions to make telephone contact with the marketplace, we circumvented the initial identity-proofing control that had stopped our online applications.

Verifying Residencies

CMS did not properly design procedures to verify the residencies of individuals. HHS regulations permit CMS to accept attestations of residency. In order to be eligible to enroll in a qualified health plan offered through a marketplace, individuals must reside in the marketplace service area. CMS officials told us that they were unaware of a comprehensive, national electronic data source that could be used to verify residence. However, CMS did not document an evaluation of available external sources to determine the quality, relevance, and reliability of the data. Internal control standards state that management should use quality information to achieve the entity’s objectives. In addition, according to GAO’s fraud risk framework, it is a leading practice to conduct data matching to verify key information, including self-reported data and information necessary to determine eligibility. Without verifying the residencies of individuals, CMS is vulnerable to enrolling ineligible individuals in qualified health plans and improperly providing advance PTC to issuers on their behalf.

Preventing Duplicate Coverage

We found design deficiencies in CMS’s procedures related to determining that advance PTC is not provided to issuers on behalf of individuals who are receiving or eligible for minimum essential coverage through their employers or government-sponsored programs. Specifically, CMS does not (1) use data from nonfederal employers to check for duplicate minimum essential coverage; (2) have procedures for terminating coverage for individuals who have employer-sponsored minimum essential coverage; and (3) have procedures for sharing coverage information with, and obtaining coverage information from, such employers. In addition, CMS checks for duplicate government-sponsored Medicaid and CHIP coverage only in the states where applicants attest to residing and thus would not detect whether applicants received such coverage in different FFM states.

Although CMS has procedures to obtain data from the Office of Personnel Management for identifying individuals receiving health care coverage from federal employers, CMS does not have procedures that use data sources to identify individuals receiving minimum essential coverage through nonfederal employers. CMS officials stated that PPACA does not require that employers report information on employer-sponsored coverage offers to HHS. CMS officials told us that they have explored other possible data sources, including Medicare Coordination of Benefits, the National Directory of New Hires, and Equifax data, but they have been unable to identify comprehensive electronic data sources that are sufficiently current and accurate for identifying these individuals. However, CMS did not document its evaluation of the availability and reliability of potential data sources. As a result, we were unable to evaluate CMS’s review of these electronic data sources and assess whether CMS reviewed other potential data sources.

CMS relies on individuals to update their marketplace applications and has not established a process for terminating advance PTC for individuals who have not updated their applications. CMS has not designed procedures for the FFM to send notices to employees who have been identified as having access to minimum essential employer-sponsored coverage regularly during each enrollment season. CMS officials told us that in 2016 they began notifying certain employers of individuals enrolled in FFM coverage with advance PTC. If employers responded and asserted that they provide individuals with access to affordable, minimum- value employer-sponsored coverage, the FFM would then send notices to those individuals notifying them to update their marketplace applications to reflect that they have access to or are enrolled in other coverage and warning them that failure to update their profiles accordingly may result in a tax liability. CMS officials told us that CMS has published information, for example, on a Frequently Asked Questions page, on the CMS website that describes the notices. However, these Frequently Asked Questions do not constitute procedures that provide guidance for sending out the notices regularly.

According to GAO’s fraud risk framework, it is a leading practice to conduct data matching to verify key information, including self-reported data and information necessary to determine eligibility. In addition, internal control standards state that management should use quality information to achieve the entity’s objectives and should obtain relevant data from reliable internal and external sources based on the identified information requirements for achieving the entity’s objectives and address risks. These standards also state that management should design control activities to achieve objectives and respond to risks.

Without policies and procedures for identifying individuals who have minimum essential coverage from nonfederal employers and for terminating advance PTC for those individuals, CMS is at greater risk of providing advance PTC to issuers on behalf of ineligible individuals.

Individuals receiving coverage from government-sponsored programs, such as Medicare, Medicaid, and CHIP, are generally allowed PTC only for the months that one or more members of the individuals’ families are not eligible for government-sponsored coverage. CMS has designed a process that identifies some but not all cases in which individuals who are applying for the advance PTC may also have government-sponsored coverage. Specifically, CMS has procedures to identify individuals with duplicate government-sponsored coverage using data from Medicare, the Peace Corps, TRICARE, and the Veterans Health Administration.

CMS did not establish a process to fully identify all individuals with duplicate government-sponsored coverage through Medicaid and CHIP. Specifically, CMS’s procedures are designed to detect duplicate coverage with Medicaid and CHIP only in the states where individuals applied for coverage through the FFM and not in any other state where the FFM operates. Consequently, its procedures do not detect when FFM applicants have duplicate coverage through Medicaid and CHIP from different FFM states than the states in which they applied and attested to residing.

According to CMS officials, FFM procedures are designed to check for Medicaid and CHIP only in the states where individuals have attested to residing during the application review process and not in other FFM states. Federal regulations require the FFM to verify whether individuals have been determined eligible for coverage through Medicaid and CHIP within the state or states in which the FFM operates by using information obtained from the agencies administering such programs. Thus, the FFM is required to verify whether individuals also have Medicaid and CHIP coverage in all states covered by the FFM and not just in states where the individuals applied for coverage and attested to reside. According to CMS officials, it would be technically difficult and impracticable for all FFM states to provide information that would allow the FFM to check Medicaid and CHIP coverage for individuals in each of those states. However, CMS did not provide us with documented analyses to support this assessment. As a result, we were unable to evaluate CMS’s assessment and determine whether CMS reviewed the feasibility of using other existing resources and tools for checking for Medicaid and CHIP coverage in all FFM states.

Internal control standards state that management should use quality information to achieve the entity’s objectives. In addition, these standards also state that management should design control activities to achieve objectives and respond to risks.

Without procedures in place to detect duplicate coverage by Medicaid and CHIP in states other than those in which individuals applied for coverage and attested to residing, CMS is at greater risk of providing advance PTC on behalf of individuals who receive Medicaid and CHIP coverage from other FFM states and are therefore ineligible for advance PTC.

Resolving Inconsistencies

Inconsistencies are generated when individual-attested information does not reasonably match information from the marketplace’s trusted data sources, or because the needed information is not available from a federal data source. In such instances, the FFM sends eligibility letters to individuals requesting explanations or supporting documentation to resolve inconsistencies within a specific time frame, referred to as an inconsistency period. Individuals are generally given 95 days to provide the requested documentation to substantiate citizenship and lawful presence and 90 days for other types of inconsistencies.

During inconsistency periods, individuals may enroll in a qualified health plan and elect to receive advance PTC. Individuals can provide explanations and substantiating documents by mail or through the marketplace website. When individuals provide sufficient documentation to substantiate the attested information, the inconsistencies are resolved. When individuals do not provide sufficient documentation within the inconsistency period, the FFM “expires” those inconsistencies and determines the eligibility based on the existing information from electronic data sources. If data are not available, marketplace enrollments may be terminated or the individuals may be determined ineligible for advance PTC.

We identified deficiencies in CMS’s design of key procedures related to resolving eligibility issues and terminating inconsistencies related to Social Security numbers and incarceration, as well as the timely termination of inconsistencies.

CMS did not properly design and implement procedures related to preventing advance PTC on behalf of individuals who submitted inaccurate or false Social Security numbers. Based on our analysis of the CMS inconsistency data for the 2016 open enrollment, we identified about 82,000 applications with unresolved Social Security number inconsistencies as of May 2016. CMS provided about $42 million in advance PTC in May 2016 on behalf of these individuals. In February 2016, we reported that unresolved Social Security number inconsistencies are indicators of potentially fraudulent applications. Unresolved Social Security number inconsistencies may also adversely affect IRS’s ability to assess and fully recover advance PTC overpayments. In our February 2016 report, we recommended that the Secretary of Health and Human Services direct CMS to design and implement procedures to resolve Social Security number inconsistencies when the marketplace is unable to verify the numbers or individuals do not provide them. HHS concurred with our recommendation, and CMS officials told us that system functionality upgrades to address Social Security number inconsistencies were completed and deployed in March 2017. In May 2017, CMS established procedures for verifying Social Security numbers with documents submitted by the applicants but has not developed procedures to terminate advance PTC for applications with unresolved Social Security number inconsistencies. CMS officials did state that further refinements to the process are likely to occur.

CMS did not properly design and implement procedures related to preventing advance PTC paid on behalf of incarcerated individuals or individuals who may be using identities of incarcerated individuals, both of which would be ineligible for advance PTC. Based on our analysis of the CMS inconsistency data for the 2016 open enrollment, we identified about 30,000 applications with unresolved incarceration inconsistencies as of May 2016. CMS provided about $10 million in advance PTC in May 2016 on behalf of these individuals. We had previously reported in February 2016 that CMS did not terminate individuals who had inconsistencies generated when verifying incarceration statuses with SSA’s Prisoner Update Processing System (PUPS) database. We reported that CMS officials told us that they did not terminate eligibility for incarceration inconsistencies because they determined that the PUPS data were unreliable for use by the marketplace. However, in the report, we stated that CMS did not provide us documentation on how it concluded that the PUPS data were unreliable for identifying incarcerated individuals or the potential cost associated with not verifying incarceration status. In the report, we recommended that the Secretary of Health and Human Services direct CMS to reevaluate the use of PUPS incarceration data in the inconsistency process. HHS concurred with our recommendation and noted in its comments to our report that PUPS data were not sufficiently current and accurate at that time. According to CMS officials, CMS continues to work with SSA to improve the quality of incarceration data used for verification. In March 2016, CMS officials stated that SSA completed developmental changes to improve the reliability of the match criteria for the incarceration database and limit the risk of receiving false positives. CMS officials stated that they are assessing whether these data improvements result in sufficiently reliable incarceration data but did not provide us a date on when the assessment will be completed.

Timely Termination or Adjustment of Advance PTC Because of Inconsistencies CMS also did not properly design procedures related to terminating or adjusting advance PTC timely when inconsistency periods have expired. Specifically, CMS’s procedures call for the processing of all expiration activities, including the notifications to issuers regarding the terminations or adjustments of advance PTC, at the beginning of the month following the month that the inconsistency periods expire. However, the effective dates of the terminations or adjustments are the last day of that month, which is also the month that notifications are provided to the issuers regarding these terminations or adjustments. Thus, by not processing terminations or adjustments of advance PTC on a rolling basis based on the effective dates of the expirations of the inconsistency periods, CMS provides an extra month of advance PTC to issuers on behalf of ineligible individuals.

The aggregate dollar amounts for the extra month of advance PTC that CMS pays each month on behalf of ineligible individuals can be significant. For example, based on our analysis of CMS inconsistency data for the 2016 open enrollment, we identified about 45,000 applications that were terminated by CMS for lawful presence or citizenship inconsistencies. As a result of its practice of processing advance PTC terminations, as of May 2016, CMS had paid about $19 million in extra advance PTC on behalf of these ineligible individuals during the 2016 open enrollment.

According to CMS officials, the current process for terminating enrollments based on expired inconsistencies gives individuals the full inconsistency period to mail in substantiating documents—and allows CMS to confirm whether sufficient documentation was provided—prior to initiating the termination process. CMS officials also stated that the processing of inconsistencies in batches also aligns with issuer operations (allowing time to adjust billing for the next month) and allows for a more efficient process. In addition, CMS officials told us that processing terminations outside of normal system and marketplace rules would require additional manual effort on the part of the marketplace and issuers. However, we could not determine the validity of the officials’ statements because CMS did not provide us with documentation or analyses demonstrating that its current process for terminating policies and advance PTC is consistent with applicable statutory requirements, or that it is more efficient and cost-effective than processing terminations more frequently.

Internal control standards state that management should identify, analyze, and respond to risks related to achieving the defined objectives. These standards also state that management should design control activities to achieve objectives and respond to risks. Without evaluating its process for terminating inconsistencies, CMS is at risk of providing an extra month of benefits to individuals who are eventually terminated from coverage because of insufficient documentation to resolve the inconsistencies.

Monitoring Continued Eligibility

Federal regulations require marketplaces to periodically examine certain available data sources to determine, among other things, whether individuals with advance PTC remain eligible. However, CMS has not developed procedures to monitor and identify changes in circumstances, such as duplicate coverage or death, that may not be reported in a timely manner and would affect individuals’ eligibility for advance PTC.

CMS checks for duplicate coverage from Medicaid in the states of individuals’ residencies at the time of initial enrollment, but CMS does not have documented procedures to regularly monitor changes in health insurance coverage throughout the year. In October 2015, we reported that CMS did not have procedures to regularly monitor unreported duplicate coverage from Medicaid in FFM states. Further, CMS had generally not provided FFM states with marketplace enrollment information that it would need to identify cases of duplicate coverage. In our report, we recommended that CMS establish a schedule for regular duplicate coverage checks and ensure that the checks are carried out according to schedule. In response to our recommendation, CMS officials told us that they completed checks for duplicate coverage. CMS officials also stated that the agency intended to perform this check at least twice per coverage year on an ongoing basis and will take steps to terminate advance PTC for any individuals identified. However, during the course of our audit, we found that CMS does not have documented procedures instructing its personnel to continue running these checks regularly.

As mentioned earlier, CMS also did not provide us with documentation on the feasibility for using other existing resources and tools for checking for Medicaid and CHIP coverage in all FFM states. As such, we were unable to evaluate CMS’s assessment to determine whether CMS reviewed the feasibility of all existing resources, such as the Public Assistance Reporting Information System (PARIS). States can use PARIS to identify duplicate Medicaid coverage across other states. CMS officials told us that they have not studied the feasibility of using PARIS for the advance PTC program.

CMS also did not properly design procedures related to (1) periodically verifying that individuals with advance PTC provided to issuers on their behalf did not begin receiving other government-sponsored health care coverage after enrollment, such as Medicare or Department of Veterans Affairs health benefits, and (2) terminating advance PTC for individuals who have such coverage. CMS officials told us that they have established a process to check individuals enrolled in the FFM for Medicare coverage and to send notices to them if there is a match. However, CMS officials stated that they do not terminate advance PTC for such individuals. In addition, CMS officials stated that when individuals update their FFM applications, CMS checks those individuals’ marketplace applications for duplicate government-sponsored health coverage. However, individuals may not update their applications if they elect to auto reenroll into plans. In such instances, CMS does not have mechanisms to terminate advance PTC for individuals who obtain or gain access to duplicative government- sponsored coverage.

In addition, CMS does not conduct any periodic checks during the year to determine if any individuals have subsequently died. According to CMS officials, when individuals stop paying their premiums, such as in the case of death, there is a 90-day grace period, as required by PPACA, after which the individuals’ policies would be canceled for failure to pay premiums. Thus, under the grace periods, CMS pays up to 3 months of additional advance PTC after individuals have died unless it is otherwise reported to their insurers. CMS officials told us that following the end of the grace periods and subsequent issuer terminations for failure to pay premiums, CMS retroactively recoups 2 of the 3 months of excess advance PTC by adjusting subsequent payments to issuers following the normal process that governs grace periods.

Internal control standards state that management should use quality information to achieve the entity’s objectives. In addition, these standards also state that management should design control activities to achieve objectives and respond to risks. Without establishing proper procedures to periodically check for changes in circumstances, such as individuals’ eligibility for government-sponsored coverage or their deaths, CMS is at increased risk of providing advance PTC on behalf of individuals who are not eligible for it.

Verifying Compliance with Tax Filing Requirements

CMS did not properly design procedures related to timely terminating advance PTC for individuals who have not filed the required federal income tax returns. Under federal regulations, marketplaces must discontinue advance PTC for individuals who did not comply with the requirement to file a federal income tax return and reconcile the advance PTC.

CMS allowed 2014 advance PTC recipients to attest as to whether they had filed a 2014 tax return when making FFM eligibility determinations for 2016. CMS offered individuals the opportunity to attest they made the proper tax filing, followed by CMS post-approval checks of IRS data. CMS officials stated that they selected this approach in order to prevent erroneous advance PTC terminations because of delays in IRS processing and availability of filing data from IRS at the time of application review. However, CMS’s process for verifying individual attestation and termination of individuals who did not file tax returns was not documented in its procedures. CMS officials told us that they had terminated advance PTC in November 2016 for individuals who IRS indicated had not filed 2014 tax returns. As a result, the marketplaces continued to pay advance PTC on behalf of those individuals for over three-quarters of plan year 2016 despite their not filing the required tax returns to reconcile their advance PTC.

In September 2016, IRS also began sending data to CMS on individuals or members of tax households on whose behalf CMS provided advance PTC but who did not file the required Form 8962, Premium Tax Credit, with their tax returns. The form is used to reconcile advance PTC amounts with the final PTC amounts. CMS did not terminate advance PTC for individuals who filed their tax returns but did not reconcile using Form 8962. However, CMS officials told us that they plan to terminate advance PTC for those who file but do not reconcile in the future.

Internal control standards state that management should use quality information to achieve the entity’s objectives. In addition, these standards also state that management should design control activities to achieve objectives and respond to risks.

Without designing and implementing policies and procedures related to preventing and detecting advance PTC to individuals who do not comply with tax filing requirements, including those who do not file Form 8962, CMS increases the risk that advance PTC will not be terminated on a timely basis. Further, the federal government is missing opportunities to recover overpayments of advance PTC as part of the IRS PTC reconciliation process. For example, as of October 2016, approximately 1 million households still had not filed the required Form 8962 with their 2014 tax returns. However, these households had approximately $2.9 billion in advance PTC paid on their behalf in 2014. Furthermore, without the required Form 8962 from individuals who received advance PTC, IRS cannot identify potential underpayments or overpayments of advance PTC.

Verifying Major Life Changes That Qualify Individuals to Enroll Outside of the Open Enrollment Period

Individuals are generally only allowed to enroll in qualified health plans during the open enrollment period. However, special enrollment periods provide an opportunity for individuals who lose health insurance coverage during the year or experience certain major life changes to enroll in a qualified health plan through the marketplaces outside of the annual open enrollment period. Examples of major life changes include the loss of minimum essential coverage, permanent move of residence, birth of a child, and marriage.

Beginning in June 2016, individuals who qualified to enroll during special enrollment periods were asked to provide documentation to substantiate certain life changes. However, during the period of our audit, CMS procedures did not require the verification of major life changes using applicant-submitted documentation.

CMS officials told us that there is no specific legal provision that requires federal and state marketplaces to verify events that trigger special enrollment periods. However, in 2016, HHS conducted a study to confirm consumers’ eligibility for special enrollment periods based on a review of documentation submitted for a sample of special enrollment periods granted during coverage year 2016. In April 2017, CMS issued a regulation to take effect on June 19, 2017, stating, among other things, that the federal marketplace will begin performing pre-enrollment verification of life changes for special enrollment periods. In the regulation, CMS stated that pre-enrollment verification of special enrollment periods will be phased in, focusing first on the categories with the highest volume and of most concern—such as loss of minimum essential coverage, permanent move, Medicaid or CHIP denial, marriage, and adoption. However, CMS has not yet designed and implemented procedures for its contractor to implement this verification process.

Internal control standards state that management should use quality information to achieve the entity’s objectives. Accordingly, management should obtain relevant data from reliable internal and external sources in a timely manner based on the identified information requirements for achieving the entity’s objectives and address risks. Management evaluates these data for reliability, obtains them on a timely basis so that they can be used for effective monitoring, and processes the obtained data into quality information to support the internal control system. In addition, these standards state that management should design control activities to achieve objectives and respond to risks.

Without verifying and documenting events that trigger eligibility for enrollments during special enrollment periods, CMS may provide advance PTC and health care coverage to individuals who are not eligible to enroll outside of the annual open enrollment period. In addition, individuals may be able to receive health care coverage for sickness or injuries inappropriately because they received coverage outside of the open enrollment period by providing false information to the FFM related to a special enrollment period event. For example, in November 2016, we reported that the FFM and selected state-based marketplaces approved health insurance coverage and advance PTC for 9 of 12 of GAO’s fictitious applications made during a 2016 special enrollment period. For 5 applicants, GAO provided no documents to support the special enrollment period triggering event, but CMS approved the coverage.

CMS’s Key Control Activities Related to the Accuracy of Advance PTC Calculations Based on Income and Family Size Are Not Properly Designed

Individuals must meet income requirements in order to qualify for advance PTC. Specifically, individuals are expected to have household incomes equal to or between 100 and 400 percent of the federal poverty level for their given family size to be eligible for advance PTC.

Although CMS designed procedures related to detecting potentially understated income amounts, its procedures do not include verifying income amounts that may be overstated. Specifically, CMS does not check for potentially overstated income amounts, despite the risk that individuals may do so in order to qualify for advance PTC. This risk is increased for states that did not expand Medicaid coverage to individuals who make less than 100 percent of the federal poverty level. To receive subsidized health care coverage in these states, individuals could overstate their income to at least 100 percent of the federal poverty level to ensure that they qualify for advance PTC. According to CMS officials, they did not check for potentially overstated income amounts because federal regulations allow CMS to accept individuals’ attestations when attested income amounts are higher than those in IRS data. However, by not checking potentially overstated income amounts, CMS may be improperly providing advance PTC to issuers on behalf of individuals not eligible for the benefit.

Along with income, family size has a direct relationship to the amount of advance PTC for which enrollees are eligible. As family size increases, the percentage of the federal poverty level for that household to be eligible for the maximum amount of PTC decreases, thereby affecting the advance PTC amount. IRS provides CMS with household income and family size information for enrollees requesting eligibility determinations for advance PTC. However, when the family size provided by an enrollee does not match the family size shown in IRS records, CMS does not generate an inconsistency. CMS accepts applicant attestations without further verification. CMS officials also told us that it could be challenging to verify family size information with documentation from individuals.

However, CMS could use federal income tax returns and other supporting documentation to substantiate family sizes.

Internal control standards state that management should use quality information to achieve the entity’s objectives. Management obtains relevant data from reliable sources. Relevant data have a logical connection with, or bearing upon, the identified information requirements. Reliable sources provide data that are reasonably free from error and bias and faithfully represent what they purport to represent. Internal control standards also state that management should design control activities to achieve objectives and respond to risks.

Without proper procedures for verifying incomes and family sizes, CMS’s risk of providing advance PTC on behalf of individuals who do not meet the minimum income eligibility requirements—including those who may purposefully misstate their incomes or family sizes in order to become eligible for advance PTC—is increased. For example, in our testing of 93 applications, we found 11 applications for individuals residing in states that did not expand Medicaid and for which the modified adjusted gross incomes for those households were less than 100 percent of the federal poverty level, according to data that IRS provided to CMS during application review. While some of these individuals may have earned additional income, they may have also overstated their incomes on their applications to become eligible for coverage and advance PTC. However, CMS did not check for potential overstatements of income amounts and generate inconsistencies to resolve such potential overstatements.

CMS Properly Designed and Implemented Control Activities Related to the Accuracy of Advance PTC Payments Made to Certified Issuers and Qualified Health Plans

Based on our audit work, CMS has properly designed and implemented procedures related to the accuracy of advance PTC to reasonably assure that payments made to issuers and qualified health plans comply with applicable requirements, including procedures to generate accurate policy-based payments to issuers based on properly review and approve of issuer payment calculations and perform compliance reviews to help ensure that issuers and qualified health plans meet applicable requirements of the marketplace; and notify issuers of noncompliance and decertify those that do not meet key requirements.

As discussed earlier, we did not test whether the control activities for making payments to issuers were operating as designed because such payments include other aggregated costs and adjustments, such as cost- sharing reductions and user fees, which were outside the scope of this audit.

IRS’s Control Activities Related to PTC Were Not Properly Designed and Implemented

IRS control activities were not properly designed and implemented to help achieve management objectives related to preventing and detecting improper payments of PTC. Specifically, we found deficiencies in the design of IRS control activities related to determining whether individuals met the citizenship or lawful presence requirement for PTC eligibility; had access to or enrollment in health care coverage that met minimum essential coverage, which would allow individuals to obtain PTC for the months that were not covered; properly assessed individual shared responsibility payments (SRP) on their tax returns; and were properly notified of the requirement to file if they did not file their tax returns.

IRS faces several challenges that affect its ability to design and implement control activities related to PTC. These challenges include the timeliness and availability of key income data to verify taxpayers’ PTC claims, resource constraints in identifying tax returns for further review, and statutory limitations for automatically correcting tax returns and recovering excess advance PTC repayments.

We did not evaluate whether all control activities related to preventing and detecting improper payments of PTC were operating as designed or evaluate other internal control components, such as control environment. Deficiencies, if any, in the internal control components that were not evaluated could further impair the overall effectiveness of IRS’s control activities related to preventing and detecting improper payments in the PTC program. (See fig. 5.)

IRS Is Unable to Design and Implement Control Activities to Verify Whether Individuals Meet the Citizenship or Lawful Presence Eligibility Requirement

To qualify for PTC, individuals must be U.S. citizens or nationals, or otherwise lawfully present in the United States. All advance PTC for those not lawfully present must be reported on tax returns and repaid in full regardless of income level. As such, individuals are not entitled to PTC for any period during which they are not lawfully present in the United States.

IRS officials told us that IRS does not perform compliance checks to verify eligibility based on individuals’ citizenship or lawful presence status. IRS officials stated that they rely on the state and federal marketplaces to determine whether the individuals met citizenship or lawful presence eligibility requirements. If IRS receives enrollment information from the state or federal marketplaces, IRS presumes that individuals met citizenship or lawful presence requirements.

While information that IRS receives from state and federal marketplaces may be effective in determining whether individuals met citizenship and lawful presence requirements for PTC, it does not address situations when state or federal marketplaces conditionally provided advance PTC on behalf of individuals but subsequently terminated advance PTC payments because of failure to prove citizenship or lawful presence. Specifically, PPACA’s implementing regulations allow individuals 95 days to provide supporting information to the marketplace when the marketplace is unable to verify that the individuals met enrollment or advance PTC requirements for citizenship or lawful presence. Consequently such individuals’ attested information qualifies them to be conditionally eligible for advance PTC during this inconsistency period. At the end of the inconsistency period, the marketplace is required to terminate advance PTC for individuals who did not resolve their inconsistencies related to citizenship or lawful presence.

Treasury regulations do not require the marketplaces to provide IRS with the reasons for terminating health care coverage or advance PTC for individuals. Because of this, the marketplaces do not report advance PTC payment terminations to IRS for individuals who do not meet the citizenship or lawful presence eligibility requirements when the marketplaces make final determinations at the end of the inconsistency periods.

Internal control standards state that management should externally communicate the necessary quality information to achieve the entity’s objectives. As part of this standard, management should obtain quality information to reasonably assure that internal control objectives—such as necessary data to verify citizenship information or legal presence requirements for PTC—are achieved.

Because Treasury does not require the state or federal marketplaces to provide information on individuals who do not meet the citizenship or lawful presence requirements, IRS has not established a mechanism to identify that individuals claiming PTC meet this key PTC eligibility requirement. Further, according to IRS officials, they have not assessed the feasibility of obtaining such information from the marketplaces and incorporating such information into their processes. The volume and dollar amount of advance PTC paid on behalf of individuals whose coverage was terminated for citizenship or lawful presence requirements can be significant. In our February 2016 report, we found that for the first enrollment period, CMS terminated about 65,000 policies from the marketplaces because individuals did not resolve their citizenship or lawful presence issues. Over $130 million in advance PTC was paid on behalf of these individuals. Thus, without access to the data needed to verify citizenship or lawful presence eligibility requirements for individuals, IRS may be missing opportunities to prevent potentially significant improper payments of PTC.

IRS Control Activities Related to Checking for Health Care Coverage Were Not Properly Designed and Implemented

IRS has not properly designed and implemented key control activities to perform the necessary post-refund checks routinely to identify individuals who are not eligible for claimed PTC amounts because of either duplicate health care coverage or availability of coverage from employers or government-sponsored programs. IRS officials stated that IRS examiners, using internal and external information systems, may check Forms 1095-B, Health Coverage, and 1095-C, Employer-Provided Health Insurance Offer and Coverage, filed for the individuals as part of their general examination procedures to verify all insurance coverage in and out of the marketplace. IRS officials stated that they rely on tax examiners’ judgment to evaluate available data and determine whether the presence or absence of a particular item on a tax return represents a potential issue. IRS developed a checklist that examiners could use in reviewing tax returns for duplicate coverage and SRP and included this checklist in the program used by the postcompliance units. However, IRS did not incorporate the checklist or instructions to use the checklist in the IRM to require its use as part of the routine procedures that examiners in the postcompliance units perform regularly.

Internal control standards state that management should design control activities to achieve objectives and respond to risks. Control activities are the policies, procedures, and other mechanisms that enforce management’s directives to achieve the entity’s objectives and address related risks.

IRS officials stated that they are reviewing the potential compliance issue related to duplicate health insurance coverage for post-refund compliance checks. IRS officials also stated that they have requested research data on the level of noncompliance for tax year 2015 and that these data will be evaluated to determine what, if any, post-refund actions are needed. Without routinely performing post-refund checks on individuals’ health insurance coverage from employers or government-sponsored health care plans, IRS is vulnerable to improperly providing PTC to ineligible recipients. The effect of IRS’s lack of routine post-refund checks on individuals’ health insurance coverage from employers or government- sponsored health care plans was illustrated in our review of a statistical sample of 93 tax returns with PTC-related amounts during the first 9 months of fiscal year 2016. Based on our testing, the number of individuals who inappropriately received PTC because of their eligibility for or receipt of minimum essential coverage outside of the marketplace could be significant. In our statistical sample of 93 PTC-related transactions for the first 9 months of fiscal year 2016, we found 7 cases in which the individuals or members of their households received subsidized coverage from the marketplaces and at the same time also had coverage through employer- or government-sponsored health care plans for at least 1 month during the year.

IRS Control Activities Related to Verifying SRP Compliance Were Not Properly Designed and Implemented

IRS also does not have properly designed and implemented key control activities to perform the necessary post-refund checks to identify individuals who did not have health care coverage for the entire year and did not comply with SRP requirements. In our statistical sample of 93 tax returns, we found that in 17 cases the individuals or all the members of their tax households did not have qualifying health care coverage for the entire year or an exemption from health care coverage for some of the months or for the entire year. For those returns, the individuals did not pay the required SRP for the months without coverage and IRS did not assess SRPs for those individuals who did not have qualifying health care coverage or have coverage exemptions for the entire year. Without properly designed and implemented key control activities to perform the necessary post-refund checks of SRPs, IRS may not always consistently and equitably assess and collect the SRP.

IRS Is Unable to Design and Implement Control Activities to Verify Individuals’ Income for Calculating PTC-Related Amounts Prior to Issuing Refunds

IRS’s ability to verify taxpayer-reported income prior to issuing tax refunds is limited because some deadlines for third parties to report key aspects of taxpayer income fall late in the tax filing season. As such, IRS does not timely receive complete income information, which impedes IRS’s ability to design control activities for verifying PTC calculations prior to issuing tax refunds. IRS’s challenge in verifying income before issuing refunds is not unique to PTC; it is an inherent risk with the tax administration processes in which refunds are issued before all compliance checks are completed. While IRS receives some income information from third parties—such as wage information from employers—by mid-February, IRS may not receive other key income information returns necessary for verifying income until later in the tax filing season. For example, Form 1099-INT, Interest Income, can be filed electronically to IRS as late as March 31, which is well into the tax filing season and too late for IRS to use for checking income reporting compliance during pre-refund processing of tax returns. Because of the timing of third parties’ submission of comprehensive information to IRS, IRS may not detect taxpayer misreporting of income before issuing refunds, which could result in improper PTC payments. As a result, IRS must rely on post-refund checks to identify any taxpayer misreporting of income after the filing season.

IRS Is Unable to Design and Implement Control Activities to Identify Tax Returns That Contain Errors for Further Review

IRS is unable to identify all tax returns that contain PTC-related errors for further review by its tax examiners. Since 2011, IRS has faced budget reductions. These budget reductions have heightened the importance of determining how best to allocate declining resources for IRS to reasonably assure that it can meet agency-wide strategic goals for increasing individual compliance, using resources more efficiently, and minimizing individual burden. As a result, IRS officials told us that IRS has prioritized its limited resources to design and implement cost-effective PTC-related key procedures to reasonably assure that it is focused on issues that may represent the greatest financial exposure to the government. To do this, IRS established dollar thresholds to limit the number of tax returns with PTC-related amounts for additional reviews by IRS examiners, as it does in other types of tax administration. As a result, IRS does not review all tax returns that may contain errors but continues to process tax returns that have the PTC exposure amount below certain threshold amounts without any adjustments or further reviews by tax examiners.

We evaluated IRS’s procedures related to the PTC processing dollar thresholds and found that IRS’s use of dollar thresholds was operating as designed during the time period of testing. However, because IRS uses dollar thresholds to limit the number of individual federal income tax returns reviewed by examiners, it does not pursue errors in overstated or understated PTC amounts below the thresholds.

Although the focus was not on PTC, we reported in 2016 that IRS lacked a comprehensive strategy for its refundable tax credit compliance efforts. In this report, we stated that IRS was working on a strategy to document current compliance efforts and identify and evaluate potential new solutions to address improper payments; however, its analysis focused on efforts to improve Earned Income Tax Credit compliance and did not include other refundable tax credits. As a result, we recommended that IRS develop a comprehensive operational strategy that includes all refundable tax credits. IRS agreed with the recommendation and stated that it is working on developing a comprehensive strategy to address compliance and improper payments related to its refundable tax credit programs, including PTC.

IRS Is Unable to Design and Implement Control Activities to Correct PTC- Related Errors on Tax Returns Prior to Issuing Refunds

A key control activity for IRS is correcting inaccuracies in individuals’ PTC calculations. IRS does this by corresponding with individuals, suspending the tax returns, or using its statutory math error authority. Based on statistical sample of 93 individual federal income tax returns with PTC- related amounts from October 2015 to June 2016, we found that IRS (1) appropriately suspended the tax returns and corresponded with individuals to resolve PTC-related issues and errors on the tax returns and (2) accurately calculated and processed PTC-related amounts in cases within its statutory authority.

IRS cannot always correct individuals’ inaccuracies that it identifies while processing tax returns. As we previously reported, in cases where individuals do not reconcile advance PTC, IRS does not have the authority to automatically correct the tax returns and notify the individuals of the changes. In other circumstances, IRS has statutory math error authority to fix easily correctable calculation errors and check for other obvious noncompliance in limited circumstances. However, in cases of a discrepancy with marketplace data, such as differences in amounts of advance PTC reported by individuals on their Forms 8962, IRS does not have the authority to automatically correct the tax returns and notify individuals of the changes. According to IRS officials, having the authority to correct PTC errors related to discrepancies with marketplace data would allow IRS to process returns more quickly without having to correspond with the individuals or expend further resources to audit their compliance.

In 2015, we suggested that IRS seek legislative authority to correct tax returns at filing based on the marketplace data. Correctable-error authority could help IRS meet its goals: processing tax returns timely, providing individuals with refunds more quickly, and reducing the burden on individuals of responding to IRS correspondence. It can also reduce the need for IRS to resolve discrepancies in post-filing compliance, which, as we previously concluded, is less effective and more costly than at filing compliance. For each year beginning with fiscal year 2015, Treasury has submitted legislative proposals that among other things, would establish a category of correctable errors. Under the proposals, Treasury would be granted regulatory authority to permit IRS to correct errors in cases where information provided by individuals does not match corresponding information in government databases. As of the completion of our audit, Congress has not yet granted this broad authority.

The effect of IRS’s lack of authority to correct PTC-related errors on tax returns at filing was illustrated in our review of a statistical sample of 93 tax returns with PTC-related amounts during the first 9 months of fiscal year 2016. We found that for 6 of the 93 sample cases, the individuals did not submit the required Forms 8962 to reconcile PTC, when marketplace data indicated that these individuals had advance PTC paid on their behalf. In addition, for an additional 2 of the 93 cases, the individuals reported different amounts on their Forms 8962 than what the marketplace data indicated. For these 8 out of 93 cases, IRS issued refunds to the individuals without adjusting the refund amounts for the PTC-related differences. Thus, without the ability to automatically correct the tax returns, IRS is not able to fully collect excess advance PTC overpayments and reimburse PTC underpayments.

IRS Is Unable to Design and Implement Control Activities for Recovering Excess Advance PTC Repayment Amounts

IRS cannot design control activities to recover all excess advance PTC repayment amounts. Marketplaces determine the amounts of advance PTC for which individuals are eligible, in part, based on each applicant’s anticipated household income for the year. The PTC amount is based on actual income reported when individuals file income tax returns. If the amounts of advance PTC paid on behalf of individuals are greater than the amounts final PTC claimed on their tax returns, then the individuals must repay excess advance PTC. However, federal law limits the amount of excess advance PTC overpayments that individuals must repay, based on their household incomes as a percentage of the federal poverty level and filing status. As a result, IRS is prohibited from recovering the full amount of excess advance PTC payments that may otherwise be due from individuals. (See table 1.) According to IRS, for fiscal year 2016, individuals had over $800 million in excess advance PTC that they were not required to repay because of repayment limitations. Under current federal law, IRS will continue to only recover the excess advance PTC repayment amounts up to the statutory repayment limitation.

IRS Control Activities Related to Notifying Nonfilers of the Requirement to File Tax Returns Were Not Properly Designed and Implemented

IRS did not properly design control activities that notified nonfilers of the requirement to file tax returns. We found that in 2015 and 2016, IRS used an ad hoc process to send notices to individuals who had advance PTC paid on their behalf during the previous calendar year and failed to file tax returns and to those who requested an extension to file. The notices alerted the individuals of the requirement to file a tax return and reconcile the advance PTC and warned that the failure to file could result in the loss of advance PTC for the following calendar year. However, IRS did not design policies and procedures for sending these notices regularly. According to IRS officials, IRS has not decided whether sending notices will be an ongoing process. IRS officials stated that if it becomes an ongoing process, then IRS will likely develop policies and procedures for sending these notices.

Internal control standards state that management should design control activities to achieve objectives and respond to risks. Control activities are the policies, procedures, and other mechanisms that enforce management’s directives to achieve the entity’s objectives and address related risks.

Without such policies and procedures in place, there is an increased risk that the ad hoc notification process will not be followed consistently in each filing season. As a result, individuals may be at risk for losing their subsidized health care coverage from the marketplaces in the future because they were not aware of the requirement to file their tax returns and reconcile the advance PTC since there is a year’s interval between when individuals first apply for advance PTC and when they are supposed to reconcile it on their tax returns. In addition, without an assessment or claim being made by individuals through tax return filing, the federal government may not be fully collecting on excess advance PTC that may be owed or pay any additional PTC that is due to individuals. Individuals’ claims are especially important because, as discussed later, IRS currently does not have the system capability to use marketplace data to calculate PTC through the Automated Substitute for Return (ASFR) program. Until IRS incorporates marketplace data into its automated process, this notification process will be key to identifying and collecting any overpayments of advance PTC made for individuals who did not file their tax returns.

IRS Is Unable to Design and Implement Control Activities for Preparing Tax Returns with PTC Information for Nonfilers

IRS was unable to incorporate PTC information in the ASFR program, a key process for preparing substitute tax returns for individuals who did not file. IRS has the authority to prepare a tax return for a nonfiling individual if the individual appears to be liable for the return and the individual required to file the return either does not file it or instead files a false, fraudulent, or frivolous return. IRS exercises this authority through its ASFR program. If IRS is unable to secure a valid income tax return from an individual, the ASFR program automatically estimates the tax liability by computing the individual’s tax, penalties, and interest, based on third- party and other available information in its systems.

However, IRS officials stated that IRS faces challenges in incorporating the PTC program into the ASFR program. Specifically, the ASFR program does not have the PTC calculators necessary to calculate the PTC amounts. The program does consider PTC-related information in determining whether a substitute for return (SFR) should be created or in calculating taxes owed when an SFR is created for an individual for other reasons. Thus, IRS cannot automatically prepare the Form 8962 or calculate PTC for non-filing individuals who had advance PTC paid on their behalf.

IRS officials stated that they recognize the lack of PTC-related calculations in the ASFR program as a gap in the collection mechanism. However, IRS officials told us that they did not have the budgetary resources to incorporate the complex calculations into the agency-wide ASFR program in 2016. Without incorporating this important programming change, IRS may not be able to recover the full extent of excess advance PTC amounts. IRS officials stated that they will consider incorporating this programming change in the ASFR program in the future subject to budgetary resource availability.

Conclusions

Preventing and detecting improper payments in the PTC programs is a complex undertaking. In fiscal year 2016, CMS assessed its PTC program as susceptible to significant improper payments, in accordance with IPIA and OMB requirements. However, CMS did not provide a specific, expeditious time frame for complying with statutory requirements to estimate and report on improper payments related to the program. As a result, HHS’s overall improper payment estimate will continue to be understated. In addition, Congress and other stakeholders will continue to lack key payment integrity information for monitoring HHS’s improper payments.

IRS did not assess the susceptibility of its PTC program in a manner consistent with IPIA requirements. Specifically, IRS did not include all types of errors that result in improper payments within the scope of its assessment and did not assess whether its PTC program met the applicable statutory thresholds for susceptibility to significant improper payments, as required by IPIA. Without estimating and reporting improper payments, IRS and external stakeholders, such as Congress, may not be able to fully assess the extent to which payment integrity objectives for the program are achieved.

Although CMS properly designed and implemented control activities related to the verification of citizenship and lawful presence and the accuracy of advance PTC payments, it did not properly design other control activities related to preventing and detecting improper payments of advance PTC. CMS often relies on insufficient, unreliable, and incomplete information for ensuring eligibility for advance PTC and accurately calculating the amounts of advance PTC. By not obtaining relevant data from reliable sources in a timely manner to meet the identified information requirements, and establishing procedures to verify eligibility of enrollees and the accuracy of advance PTC, CMS cannot reasonably assure that its payment integrity objectives are achieved.

IRS did not properly design and implement certain key control activities related to preventing and detecting PTC improper payments, including recovering excess advance PTC overpayments. While IRS may not receive key information from marketplaces to identify individuals who did not demonstrate that they met citizenship or lawful presence requirements, IRS has not assessed the feasibility of requiring such information from the marketplaces and incorporating such information in its processes to recover advance PTC made for those individuals. In addition, IRS lacks certain key procedures to verify health care coverage on individuals routinely during its post-filing compliance checks. Without such checks, IRS may be missing opportunities to identify individuals who are not eligible for PTC because they can obtain health care coverage outside of the marketplaces or identify individuals who did not properly report their SRPs on their income tax returns. Finally, although IRS used an ad hoc process for notifying nonfilers of the requirement to file tax returns, IRS did not establish procedures for sending these notices regularly during each filing season to facilitate compliance. Without addressing these key deficiencies in control activities, IRS is at increased risk of making improper payments to individuals and may not be fully collecting excess advance PTC or reimbursing PTC underpayments.

IRS also faces data limitations, such as the availability of key income information from third parties, and statutory challenges that impede its ability to prevent improper payments, recover excess payments of advance PTC, and reimburse underpayments. For instance, in cases of discrepancies with marketplace data, IRS does not have the authority to automatically correct the tax returns and notify the taxpayers of the changes. In addition, there are statutory repayment limitations on the amount of excess advance PTC that taxpayers are required to return to the government. As a result, opportunities to recover PTC improper payments are limited in these areas unless statutory changes are made. In addition, resource constraints necessitate IRS making difficult decisions about how best to use its resources to identify taxpayer noncompliance and set objectives related to preventing and detecting improper payments for the PTC program. In 2016, we recommended that IRS develop a comprehensive operational strategy that includes all refundable tax credits for which IRS is responsible. Implementing our 2016 recommendation could help IRS determine whether its current allocation of resources for PTC is optimal and, if not, what adjustments may be needed.

Recommendations for Executive Action

To improve annual reporting on PTC improper payments, control activities related to eligibility determinations, and calculations of advance PTC, we recommend that the Secretary of Health and Human Services direct the Administrator of CMS to take the following 10 actions: 1. Annually report improper payment estimates and error rates for the advance PTC program. 2. Until annual reporting of improper payment estimates and error rates for the advance PTC program is performed, disclose significant matters relating to IPIA estimation, compliance, and reporting objectives for the advance PTC program in the agency financial report, including CMS’s progress and timeline for expediting the achievement of those objectives and the basis for any delays in meeting IPIA requirements. 3. Design and implement procedures for verifying the identities of phone and mail applicants to reasonably assure that ineligible individuals are not enrolled in qualified health plans in the marketplaces or provided advance PTC. 4. Assess and document the feasibility and availability of obtaining sufficiently reliable data to verify individuals’ residencies and lack of minimum essential coverage from nonfederal employers and, if appropriate, design and implement procedures for using such data in its verification processes. 5. Design and implement procedures for sending notices to nonfederal employers routinely and terminating advance PTC for individuals who have access to minimum essential coverage from their employers. 6. Assess and document the feasibility of approaches for (1) identifying duplicate government-sponsored coverage for individuals receiving Medicaid and CHIP coverage in FFM states outside of the states where they attest to residing and (2) periodically verifying individuals’ continued eligibility by working with other government agencies to identify changes in life circumstances that affect advance PTC eligibility—such as commencement of duplicate coverage or deaths— that may occur during the plan year and, if appropriate, design and implement these verification processes. 7. Assess and document the feasibility of approaches for terminating advance PTC on a timelier basis and, as appropriate, design and implement procedures for improving the timeliness of terminations. 8. Design and implement procedures for verifying compliance with applicable tax filing requirements—including the filing of the federal tax return and the Form 8962, Premium Tax Credit—necessary for individuals to continue to be eligible for advance PTC. 9. Design and implement procedures for verifying major life changes using documentation submitted by applicants enrolling during special enrollment periods. 10. Design and implement procedures for verifying with IRS (1) household incomes, when attested income amounts significantly exceed income amounts reported by IRS or other third-party sources, and (2) family sizes.

To comply with improper payments reporting requirements and improve procedures related to processing PTC information on tax returns, we recommend that the Commissioner of Internal Revenue direct the appropriate officials to take the following 5 actions: 1. Assess the program against applicable IPIA-defined thresholds and conclude on its susceptibility to significant improper payments, and revise the scope of its improper payments susceptibility assessment for the PTC program to include instances in which advance PTC is greater than or equal to the amount of PTC claimed on the tax return. If the program meets the IPIA definition for being susceptible to significant improper payments based on this assessment, estimate and report improper payments associated with the PTC program consistent with IPIA requirements. 2. Assess and document the feasibility of approaches for incorporating information from the marketplaces on individuals who did not demonstrate that they met the eligibility requirements for citizenship or lawful presence in the tax compliance process. If determined feasible, IRS should work with Treasury to require marketplaces to periodically provide such information on individuals and use such information to recover advance PTC made for those individuals. 3. Assess whether IRS should require its examiners to verify health care coverage of individuals to determine eligibility for PTC. To do this, IRS should complete its evaluation of the level of noncompliance related to duplicate health insurance coverage. Based on this evaluation and if cost effective, IRS should design and implement formal policies and procedures to routinely identify individuals inappropriately receiving PTC because of their eligibility for or enrollment in health care programs outside of the marketplaces and notify such individuals of their ineligibility for PTC. 4. Design and implement procedures in the IRM for examiners in the post-filing compliance units to review tax returns for health insurance coverage for the entire year, and to identify and assess individual SRPs from those who are not appropriately reporting SRPs on their tax returns. 5. Design and implement procedures in the IRM to regularly notify nonfilers of the requirement to file tax returns in order to continue to receive advance PTC in the future.

Agency Comments and Our Evaluation

We provided a draft of this report to HHS, IRS, and OMB for comment. In its comments, reproduced in appendix III, HHS concurred with seven of our recommendations and neither agreed nor disagreed with the remaining three recommendations. In its comments, reproduced in appendix IV, IRS agreed with two recommendations, partially agreed with two other recommendations, and disagreed with the remaining recommendation. OMB’s liaison to GAO stated in an e-mail that OMB had no comments on the report. HHS and IRS also provided technical comments, which we incorporated as appropriate.

Health and Human Services

In its comments, HHS stated that it is committed to ensuring access to high quality healthcare for all Americans by verifying the eligibility of consumers who apply for enrollment in qualified health plans through a marketplace and providing coverage to eligible individuals. HHS stated that it takes seriously its responsibilities to protect taxpayer funds while reducing the burden on consumers, employers, and other individuals and entities involved in the marketplace and other insurance affordability programs. In its response, HHS described its initiatives to enhance the integrity of its program, including conducting a fraud risk assessment for potential risk in the marketplace and working towards estimating and reporting improper payments for advance PTC. In addition, HHS described its process for verification of identity, determination of eligibility of enrollment through the marketplace, confirmation of individuals’ compliance with tax filing requirements, and payments of advance PTC to certified issuers. HHS stated that it looked forward to continuing to benefit from suggestions from GAO and HHS’s Office of Inspector General on ways to improve its operations so eligible individuals can gain coverage through the marketplaces and insurance affordability programs in a way that prevents consumer harm and protects taxpayer money.

HHS stated that it concurred with 7 of our 10 recommendations and described actions it has taken or plans to take to address these 7 recommendations. Such actions include (1) reporting on its progress in designing and implementing an improper payment estimate for the advance PTC program in future agency financial reports, (2) documenting the feasibility of modifying certain verification procedures, and (3) verifying key eligibility requirements, such as compliance with tax filing requirements and changes in life circumstances that qualified applicants for enrollment during special enrollment periods. The actions by HHS, if implemented effectively, would address our recommendations.

For the remaining three recommendations, HHS did not state whether or not they concurred with the recommendations.

In response to our third recommendation regarding verification of filer identity, HHS stated that for individuals starting a new application via phone, the call center representatives use verbal attestations for identity verifications from individuals. HHS stated that for paper applications, individuals must provide names and complete addresses as well as other information. In addition, HHS stated that individuals must attest that the information they provide on all applications is accurate by signing under penalty of perjury. However, we continue to believe that because CMS does not validate the identities of individuals who apply by phone or mail, CMS is vulnerable to enrolling ineligible individuals in qualified health plans with advance PTC.

For our fifth recommendation on sending notices to nonfederal employers, HHS stated that it is evaluating its 2016 employer notice program to determine the best approach for notifying employers in the future. Such an evaluation may provide useful information; however, we continue to believe that designing and implementing procedures for sending notices to nonfederal employers and terminating advance PTC to individuals with access to employer-sponsored coverage can reduce the risk of providing advance PTC to issuers on behalf of ineligible individuals.

In response to our tenth recommendation regarding verification of household income and family sizes, HHS stated that as part of its eligibility verification requirements, it verifies consumer-reported income with data from IRS. However, HHS stated that because household incomes may fluctuate year to year, it is difficult for consumers to project income for the year in advance. According to HHS, in instances where applicant-reported income is higher than the IRS data, HHS accepts the consumer attestation. However, HHS stated that it will assess the feasibility and burden on individuals of setting a reasonable threshold for the generation of annual household income inconsistencies that would require additional verification for consumer-attested income that significantly exceeds income amounts reported by IRS or other third party sources. We believe that such an evaluation is a reasonable step to address our recommendation to enhance the effectiveness and efficiency of the program related to verification of household income. In addition, HHS stated that it currently accepts attestation when the family size provided by the individual does not match IRS’s records. HHS stated that establishing a process to verify family size with IRS would require significant operational and privacy complexity. While we recognize that there may be certain complexities in the verification of family sizes, it is important that CMS develop policies and procedures to reasonably assure that such verifications are made on a regular basis.

Internal Revenue Service

In its comments, IRS stated that it faces significant challenges administering refundable tax credits given their complex structural design and the difficulty in validating eligibility criteria. IRS stated that it also faces significant challenges in the use of third party and other data to validate information provided by filers because many potential sources contain information that is incomplete, out-of-date, or otherwise unsuitable for use in tax administration. IRS also stated that the complexity of the law means that not every situation is a matter for simple adjudication. IRS added that it must take all these factors into account when designing and implementing pre-filing and post-filing approaches to tax compliance. IRS also stated that its refundable tax credits may have compliance-related risks that differ from those associated with other tax provisions and that administration of these provisions must address these unique risks. According to IRS, it has committed to OMB that it will conduct a quantitative analysis of PTC in fiscal year 2018, the first year that National Research Program data will be available to perform such analysis.

IRS stated that that it agreed with two of our recommendations, partially agreed with another two recommendations, and disagreed with the remaining recommendation.

IRS agreed with our second and third recommendations related to meeting eligibility requirements for citizenship and identifying individuals with duplicate health insurance coverage. IRS outlined several actions it plans to take to address those recommendations. These actions, if implemented effectively, would address our recommendations.

IRS partially agreed with our first recommendation related to an improper payment assessment for the PTC program. IRS stated that instances in which the advance PTC is greater than or equal to the PTC amount claimed on the tax return do not result in the IRS increasing the outlay related to PTC and so these occurrences are not subject to IPIA. While we acknowledge that IRS’s interpretation of the IPIA definition of “payments” excludes reductions in tax receipts, we nonetheless believe that these instances should be considered within the scope of the IRS susceptibility assessment for improper payments. Taxpayers may inaccurately complete Form 8962 and erroneously report excess advance PTC on their returns instead of claiming net PTC, or they may simply fail to report net PTC on their tax returns altogether. Such errors would result in underpayments of net PTC and therefore affect program outlays and improper payments. In addition, IPIA defines improper payments to include both overpayments and underpayments. IRS also stated that it conducted its fiscal year 2016 PTC improper payment risk assessment consistent with OMB guidance but will discuss with OMB a future change to the approach for assessing PTC improper payments as part of a larger discussion about the administration of refundable tax credits. However, IRS did not conclude whether or not the program may be susceptible to significant improper payments. Further, although we found that IRS used all of the required qualitative risk factors specified in IPIA and OMB guidance within its assessment, IRS did not analyze how each of the risk factors affected the susceptibility of the program to significant improper payments. Until IRS conducts an appropriate assessment consistent with IPIA and OMB guidance, it will continue to be uncertain about whether it should estimate the amount of improper PTC payments.

IRS also partially agreed with our fifth recommendation related to notifying non-filers of the need to file to continue receiving advance PTC. IRS stated that using a research-based approach to evaluate the 2015 tax filing season, it developed a post-compliance process for sending notices to individuals who received advance PTC paid on their behalf in the previous calendar year but failed to file a tax return and also to those who requested an extension to file. IRS stated that being flexible in its approach has allowed IRS to refine the process to improve efficiency and effectiveness. IRS further stated that based on the 2017 research analysis, IRS will determine whether the information should be included in an existing IRM. We agree that IRS should review its process to improve the efficiency and effectiveness of its operations. However, we continue to believe that designing and implementing procedures to regularly notify non-filers of the need to file to continue receiving advance PTC decreases the risk that the ad hoc notification process will not be followed consistently in each filing season.

IRS disagreed with our fourth recommendation related to reviewing tax returns to those who are not reporting SRP. However, IRS stated that, among other things, it has drafted a new IRM section for examiners who are responsible for reviewing tax returns to determine whether health insurance is reflected for the taxpayer for the entire year, and for identifying and assessing SRP on taxpayers who are not appropriately reporting SRP on their tax returns. IRS stated that the IRM section is pending approval by Exam Policy. Although IRS stated that it disagreed with our recommendation, we believe that the actions that IRS described in its response to our draft report would sufficiently address our recommendation if implemented effectively.

We are sending copies of this report to the appropriate congressional committees, the Director of the Office of Management and Budget, the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, the Commissioner of Internal Revenue, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-2623 or davisbh@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

The objectives of this report are to determine the extent to which (1) the Centers for Medicare & Medicaid Services (CMS) and the Internal Revenue Service (IRS) assessed the susceptibility of their premium tax credit (PTC) programs to significant improper payments and, if the programs were deemed susceptible, whether CMS and IRS took actions required by the Improper Payments Information Act, as amended (IPIA), and Office of Management and Budget (OMB) guidance; (2) CMS properly designed and implemented key internal control activities related to preventing and detecting improper payments of advance PTC; and (3) IRS properly designed and implemented key control activities related to preventing improper payments of PTC in processing federal income tax returns, detecting and recovering advance PTC overpayments made to issuers on behalf of policyholders, and reimbursing underpayments made to policyholders. Further, for those key control activities assessed that we determined were properly designed and implemented, we evaluated the extent to which they were operating as designed.

To address our first objective, we reviewed improper payments reporting requirements and guidance, such as that in IPIA and the related guidance in Appendix C to OMB Circular No. A-123, Requirements for Effective Estimation and Remediation of Improper Payments, to identify requirements that agencies must meet to ascertain whether their programs are susceptible to significant improper payments. We interviewed key officials from CMS and IRS to gain an understanding of their processes for implementing IPIA requirements, including how each of their risk assessments were performed and their plans, if any, to estimate and report on improper payments related to PTC. We also analyzed CMS and IRS risk assessments for fiscal year 2016 to determine whether they were consistent with IPIA and OMB guidance. Specifically, we examined documentation to determine whether the CMS and IRS risk assessments (1) considered the qualitative risk factors specified by the improper payments requirements, (2) provided a basis for the risk determination, and (3) sufficiently concluded whether the programs met the criteria for susceptibility for significant improper payments. In addition, we considered relevant IPIA requirements, OMB guidance, and Standards for Internal Control in the Federal Government to assess whether the Departments of Health and Human Services and the Treasury externally communicated necessary quality information in their 2016 agency financial reports regarding improper payments for the PTC programs.

To address our second objective, we first reviewed the Patient Protection and Affordable Care Act (PPACA), its implementing regulations, relevant internal control standards, and leading practices for measuring fraud risks in federal programs. Based on this review, we identified CMS’s relevant risk areas and the key control activities needed to prevent and detect improper payments of advance PTC. These control activities included those related to verifying applicants’ eligibility requirements to receive advance PTC, accurately determining advance PTC amounts based on expected household incomes and family sizes, and making accurate PTC payments to certified issuers for qualified health plans. The key control activities we selected are those that we viewed as critical for addressing the various types of key risks that CMS faces that are likely to result in improper payments of advance PTC.

For this objective, we evaluated CMS’s key control activities related to CMS’s federally facilitated marketplace (FFM) for plan year 2016. We selected the FFM because it represented about two-thirds of the states and about 75 percent of all enrollees receiving advance PTC at the time of our audit. For our audit, we assessed whether the key control activities at CMS, both individually and in combination with other control activities, were properly designed to prevent and detect improper payments of advance PTC.

We then evaluated the design of these key control activities at CMS by reviewing CMS policies, procedures, and other relevant documents, such as interagency agreements and standard operating procedures for eligibility support workers. We evaluated the key control activities to determine whether they sufficiently addressed the key risk areas that we identified by inspecting and analyzing relevant policies and procedures and directly testing the design of certain controls contained therein using the sample method described below. For key control activities that we determined were properly designed, we then performed walk-throughs and reviewed documents related to the control activities to determine whether CMS had properly implemented them.

For key control activities that we determined were properly designed and implemented, we evaluated whether they were operating as designed by testing a statistically random sample of FFM policyholders with advance PTC payment transactions from CMS. To evaluate whether such key control activities at CMS were operating as designed during the FFM’s PPACA’s 2016 open enrollment period, we obtained all 2016 open enrollment application transactions, including auto reenrollment application transactions that had effectuated medical policies from the FFM that were submitted from November 1, 2015, through February 1, 2016, and resulted in advance PTC. The total population of these transactions was approximately 5.0 million records. To assess the reliability of the application data, we (1) interviewed knowledgeable CMS officials about the quality control procedures the agency had in place when collecting and creating the data and (2) electronically tested the data. Based on the results of these procedures, we determined that the data were sufficiently reliable for our purposes.

From the population of approximately 5.0 million applications, we randomly selected 93 applications that had effectuated policies according to CMS records. For these 93 applications, we reviewed CMS records to determine whether the agency had performed the required internal control activities related to verifying key eligibility requirements and determining payments of advance PTC. We also used the random sample to provide evidence of the effect of providing advance PTC on behalf of individuals who did not meet the minimum income eligibility requirements. We did not evaluate whether the control activities related to the accuracy of advance PTC payments to issuers were operating as designed because such payments included aggregated costs and adjustments, such as cost- sharing reduction subsidies and user fees, which were outside the scope of our audit. As a result, the focus of our work in this area was on the design and implementation of key control activities related to preventing and detecting improper payments of advance PTC made to issuers.

Similar to our procedures for our second objective, to address our third objective, we first reviewed PPACA, its implementing regulations, relevant internal control standards, and leading practices for managing fraud risks in federal programs. Based on this review, we identified IRS’s relevant risk areas and the key control activities needed to prevent improper payments of PTC, including recovering overpayments and reimbursing underpayments. These key control activities were related to verifying individuals’ eligibility for PTC, accurately calculating PTC claims, recovering overpayments (and reimbursing underpayments) related to advance PTC, and appropriately resolving PTC-related errors and discrepancies on federal income tax returns. The key control activities we selected are those that we viewed as critical for addressing the various types of key risks that IRS faces that are likely to result in improper payments of PTC, including the failure to recover overpayments (and reimburse underpayments).We evaluated IRS’s key control activities from October 1, 2015, to June 18, 2016. We also did not evaluate whether key control activities that we determined were not properly designed and implemented were operating as designed because, without proper design and implementation, such control activities cannot achieve the control objectives.

We assessed whether the key control activities at IRS, both individually and in combination with other controls, were properly designed to achieve their objectives and address the related risks for preventing and detecting improper payments of PTC. Specifically, we reviewed IRS’s processes and control activities, evaluated the design of key control activities, and identified any gaps and deficiencies. We evaluated the design of key control activities at IRS by inspecting and analyzing relevant policies and procedures contained in the Internal Revenue Manual and other relevant documents and directly testing the design of certain control activities contained therein using the sample methodology described below. For key control activities we found to be properly designed, we then assessed whether IRS properly implemented those key internal control activities. To do this, we performed walk-throughs and reviewed documentation of those key control activities.

We tested certain key control activities at IRS to determine whether they were operating as designed. To do this, we obtained a universe of PTC transaction data from federal income tax returns that had PTC-related transactions from October 1, 2015, to June 18, 2016, and then identified a relevant total population of approximately 6.1 million transactions. To assess the reliability of the PTC-related transaction data, we (1) reviewed IRS’s Individual Income Tax Credits reports and supporting data extracts, (2) interviewed knowledgeable IRS officials about the quality control procedures IRS has in place for collecting and creating the data, and (3) electronically tested the data. Based on the results of these procedures, we determined that the data were sufficiently reliable for our purposes.

From the population of approximately 6.1 million transactions, we randomly selected 93 federal income tax returns with PTC transactions for our sample. For these 93 items, we reviewed the related federal income tax returns, including the Form 8962, Premium Tax Credit, and IRS processing reports and financial records on PTC-related transactions to determine whether IRS had performed the required internal control activities related to processing the credits. We also used this random sample to provide evidentiary support and illustrative examples of the effect of IRS’s lack of statutory authority to correct PTC-related errors on tax returns and certain identified control deficiencies.

Because we followed a probability procedure based on random selections, each of our samples (for both CMS and IRS) is only one of a large number of samples that we might have drawn from the respective sampling populations. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. Confidence intervals are provided along with each sample estimate in this audit report. The results apply to the universes of (1) all FFM application transactions received from November 1, 2015, through February 1, 2016, with effectuated medical policies that resulted in payments of advance PTC and (2) PTC transaction data from federal income tax returns occurring from October 1, 2015, through June 18, 2016.

While our second and third audit objectives focused on certain significant control activities related to preventing and detecting the improper payments of PTC programs at CMS and IRS; we did not evaluate all control activities and other components of internal control. If we had done so, additional deficiencies may have been identified that could impair the effectiveness of the control activities evaluated as part of this audit. Appendix II provides additional details on standards for internal control in the federal government.

We conducted this performance audit from January 2016 to July 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Standards for Internal Control in the Federal Government

Standards for Internal Control in the Federal Government provides the overall framework for establishing and maintaining internal control. Internal control should be designed, implemented, and operating effectively to provide reasonable assurance that the operations, reporting, and compliance objectives of an entity will be achieved. The five components of internal control are as follows:

Control environment: The foundation for an internal control system. It provides the discipline and structure to help an entity achieve its objectives.

Risk assessment: Assesses the risks facing the entity as it seeks to achieve its objectives. This assessment provides the basis for developing appropriate risk responses.

Control activities: The actions management establishes through policies and procedures to achieve objectives and respond to risks in the internal control system, which includes the entity’s information system.

Information and communication: The quality information management and personnel communicate and use to support the internal control system.

Monitoring: Activities management establishes and operates to assess the quality of performance over time and promptly resolve the findings of audits and other reviews.

An effective internal control system has each of the five components of internal control effectively designed, implemented, and operating and the five components operating together in an integrated manner. In this audit, we evaluated certain significant control activities at the Centers for Medicare & Medicaid Services and the Internal Revenue Service related to preventing and detecting improper payments in the premium tax credit programs. In addition, we also used the information and communication component of internal control and related principles as a criterion for addressing our audit objectives.

Appendix III: Comments from the Department of Health and Human Services

Appendix IV: Comments from the Internal Revenue Service

Appendix V: GAO Contact and Staff Acknowledgements

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Matthew Valenta, Assistant Director; Maria Hasan, Auditor in Charge; Jeff Arkin; Laura Bednar; Marcia Carlsen; Nina Crocker; Francine DelVecchio; Maxine Hattery; Wilfred Holloway; Jason Kelly; Jason Kirwan; Heena Patel; Ricky A. Perry, Jr.; Kailey Seibert; Monasha Thompson; and Jingxiong Wu made key contributions to this report.