Patient Protection and Affordable Care Act: IRS Needs to Strengthen Oversight of Tax Provisions for Individuals
Released: 2015-07-29T00:00:00

Letter

Background

Beginning with tax year 2014, individuals are to report on their health care coverage, report exemptions to the coverage requirement, pay the shared responsibility tax penalty when they file their tax returns, or do some combination of the above.reporting process.

For the 2015 Filing Season, Delayed Reporting Requirements and Incomplete Marketplace Data Led to Various Challenges

In January 2015, IRS began processing tax year 2014 tax returns, on which taxpayers were first required to report health care coverage information. IRS also started verifying taxpayers’ PTC claims using data from the marketplaces. However, IRS had limited information with which to verify the information taxpayers reported because complete marketplace data for most states were not submitted by the due date and the requirement for health issuers and applicable large employers to submit information returns was delayed until tax year 2015.

IRS Is Using Various Compliance Tools to Verify Taxpayer-Reported Shared Responsibility Information, but Delayed Reporting Requirements Limited IRS Efforts

IRS has limited information with which to verify the 2014 health coverage, exemption, and SRP information taxpayers reported. Therefore, according to IRS officials, IRS is using its standard examination processes to check the information taxpayers report. According to IRS officials, based on available resources, they will balance their compliance efforts related to the health coverage requirements issue with compliance efforts on other issues. For tax year 2015 tax returns, IRS plans to begin implementing additional PPACA provisions that will expand its capability to verify compliance with the health care coverage requirements by using information reported by health issuers and employers. To help prepare for these compliance checks, IRS plans to analyze filing behaviors and patterns for 2014 tax returns, such as the characteristics of taxpayers who reported an SRP.

Health care coverage verification. IRS could verify the coverage information reported by marketplace customers on their 2014 tax returns using the Form 1095-A information provided by the marketplaces. However, IRS could not verify the coverage information reported by other taxpayers for 2014 because IRS did not require issuers of coverage (e.g., health insurers) and certain large employers to file Forms 1095-B and 1095-C until 2016 (for tax year 2015). In future filing seasons, IRS plans to use information reported on these forms during the post-filing compliance process to verify taxpayers’ claims of health coverage from sources other than marketplaces, such as an employer, Medicare, or Medicaid.

Verification of exemption information. Verification of whether a taxpayer received approval for a marketplace-granted exemption is dependent on the marketplaces reporting this information to IRS. Marketplaces were required to include 2014 exemption data in their monthly EPDs due January 15, 2015. However, according to IRS officials, as of May 31, 2015, IRS had exemption data available for return processing for 13 of the 51 marketplace states and did not have exemption data for the remaining 38 states. Some marketplaces experienced delays in completing the review and approval process for applicants who applied for an exemption. The delay in marketplace approval process for exemption applications left affected taxpayers without the information they needed to complete Form 8965, Health Coverage Exemptions, which taxpayers claiming a marketplace-granted exemption must attach to their tax return. In light of the potential for pending marketplace exemption applications, in the instructions to Form 8965, IRS instructed affected taxpayers to write “pending” on the Form 8965; the instructions did not direct taxpayers to file amended tax returns once the marketplaces processed their exemption applications. In addition to delays in marketplace processing of exemption applications, there were delays in IRS receiving exemption data from the marketplaces. IRS experienced technical problems processing exemption data from the marketplaces. According to IRS officials, IRS systems wrongly returned an error code when the marketplaces transmitted exemption data to IRS. Initially, IRS advised the marketplaces that they could wait to submit the exemption data until IRS addressed this technical problem. In mid-March 2015 IRS advised the marketplaces to submit the data despite the problem.

Verification of the shared responsibility payment. Verification of whether taxpayers owe an SRP, as well as how much they owe, is dependent on IRS having complete data on whether taxpayers had qualifying health care coverage for the full year, and whether they had an exemption for part or all of the year. Without information on health care coverage from issuers and large employers—on Forms 1095-B and 1095- C, respectively—and without information on exemptions granted by the marketplaces, IRS is unable to perform automated post-filing compliance procedures through comparing this third-party information to individual income tax return reporting. For tax year 2014 returns, IRS plans to perform limited post-filing compliance procedures for SRP in specific circumstances. For example, IRS may pursue collection procedures for taxpayers who do not pay the SRP amounts they report on their tax returns. In addition, IRS may review and recalculate self-reported SRP amounts for tax returns selected for examination for reasons other than the SRP.

Silent returns. Some taxpayers filed 2014 tax returns that did not report health coverage information, claim an exemption, or report an SRP. IRS refers to these cases as silent returns. According to IRS officials, one reason for silent returns is that some taxpayers could be claimed as a dependent on another return. According to preliminary filing season data, as of May 28, 2015, more than 11 million taxpayers filed silent returns (see table 2).

IRS officials estimated that about 58 percent of the silent returns posted as of the end of May 2015 were from filers who reported that they could be claimed as dependents on another return. One reason a taxpayer might file a silent return could be the first-year challenge of understanding the complex new shared responsibility reporting requirement. IRS goals include encouraging voluntary compliance with tax responsibilities and its mission includes enforcing the law with integrity and fairness to all. IRS has various tools that it can use to enhance taxpayer understanding and encourage compliance with new reporting requirements. According to IRS officials, IRS has solicited feedback from paid preparers and tax software companies and will consider their input to help determine changes to the Form 8965, Health Coverage Exemptions instructions that could facilitate more accurate reporting. Additional tools are also available. Most tax returns are filed using tax software and IRS provides guidance to tax software companies regarding changes to filing requirements. Officials from a tax software company told us that with clear policy instruction from IRS and sufficient time, they could design their tax software to prevent taxpayers from omitting required health coverage information on their returns. For tax year 2014 the company’s tax software guided, but did not require, taxpayers to report health coverage information. IRS can also issue soft notices—IRS letters to taxpayers that are designed to serve as an educational tool and improve voluntary compliance, and generally do not require taxpayers to respond to IRS. In the past, IRS has used soft notices to correct errors and collect funds without initiating an examination.

According to IRS officials, certain tools used to encourage compliance with other requirements are not available to address silent returns. Specifically, IRS has determined that it does not have the authority to reject tax returns at filing because they are silent, although IRS can reject returns that do not include other required information. preparers do not need to meet due diligence requirements that are specific to the shared responsibility provision.practices for practitioners to gather necessary health coverage information to use in preparing 2014 tax returns for their clients, which stated that tax preparers are expected to exercise the same due diligence for reporting client’s health care coverage information as they would for nearly all other entries on a tax return.

For example, for paper tax returns, IRS staff review each return to ensure that all forms and data needed to process the return are included, and IRS may correspond with taxpayers to obtain missing information.

IRS estimated that more than 40 percent of the silent returns posted as of the end of May 2015 were from filers who did not report that they could be claimed as dependents on another return. This estimate raises questions about compliance with the shared responsibility reporting requirements. Assessing the costs and benefits of options for addressing taxpayer noncompliance with these requirements would help IRS determine what compliance actions would best support its goals to encourage voluntary compliance while enforcing the law with integrity and fairness to all.

Incomplete and Delayed Marketplace Data Limited IRS’s Ability to Implement Planned Pre-refund Premium Tax Credit Compliance Checks during the 2015 Filing Season

Although IRS created a new system to verify PTC claims, incomplete and delayed marketplace data limited IRS’s ability to use the system to verify claims at the time of return filing. To verify PTC claims on individual income tax returns, IRS relies on marketplace data to confirm a taxpayer was enrolled in a qualified plan. As illustrated in figure 3, at the time of filing (i.e., before any refund is issued), IRS’s new Affordable Care Act Verification Service (AVS) system compares the information taxpayers reported on their tax return to information the marketplaces provided, potentially identifying math errors or discrepancies with the marketplace data. For example, AVS may identify cases where a marketplace reported that a taxpayer received the advanced PTC, but the taxpayer did not report it on his or her tax return. In another example, AVS may detect cases where taxpayers claim the PTC on their tax returns, but are ineligible because they were not enrolled in a marketplace plan. If IRS is unable to resolve such discrepancies through its initial process of corresponding with taxpayers, it may freeze all or part of the PTC-related refund, and refer the cases to examination for further review.

The monthly EPD files serve as the principal source of information IRS uses to verify taxpayers’ PTC claims with the AVS system. To reconcile PTC information taxpayers report during the filing season, including advance PTC payments that were issued to insurers, IRS is dependent on receiving complete and accurate coverage data from the health insurance marketplaces in a timely manner. However, some health insurance marketplaces did not meet the deadlines for providing IRS with complete tax year 2014 health care coverage information and some of the information submitted was inaccurate.

Timeliness of EPD submissions. Although the EPD submissions with full year 2014 data were due to IRS on January 15, 2015, the FFM and four SBMs did not transmit full year 2014 data until February 2015. By the end of the filing season on April 15, 2015, two SBMs had not transmitted full year 2014 data to IRS.

Timeliness of 1095-A information. Several marketplace states also did not meet the February 2, 2015, deadline for submitting the annual 1095-A data to IRS. As of February 9, 2015, according to IRS data all but seven marketplace states had successfully transmitted 1095-A data to IRS. As of May 11, 2015, four SBMs had not successfully transmitted 1095-A data to IRS. One of these four states successfully transmitted the information during the week of May 12, 2015, almost a full month after the end of the filing season. As of June 8, 2015, the remaining three states had not successfully transmitted 1095-A information to IRS.

Accuracy of marketplace data. Some marketplaces issued incorrect Form 1095-A information to taxpayers. CMS announced it had issued approximately 800,000 Forms 1095-A that included incorrect premium information used to calculate PTC. One SBM reported that it had issued approximately 100,000 Forms 1095-A with inaccuracies, including dates of coverage and number of family members enrolled, which are also used in calculating the amount of PTC. While IRS uses the more comprehensive EPD data transmission as the primary source of marketplace data for pre-refund compliance checks on PTC claims, in the absence of EPD information, according to IRS procedures, IRS may use the 1095-A data transmitted by the marketplaces to verify taxpayer PTC claims. According to IRS officials, IRS checks that the marketplace data meet formatting standards, but it does not check for accuracy of the data.

State marketplace and CMS officials cited multiple factors that contributed to the delayed transmission of complete 2014 marketplace data to IRS. Some state officials acknowledged that as they approached the end of December 2014, they placed a higher priority on processing consumer applications for marketplace coverage for 2015, as opposed to ensuring they were ready to transmit the January EPD or 1095-A files to IRS. State and CMS officials also noted that issuing paper Forms 1095-A to taxpayers by the February 2, 2015, deadline was also a higher priority than the January data transmissions to IRS. In addition to these issues, some state marketplace officials noted that they were impacted by what they described as IRS’s limited windows of availability for testing the data exchange process in advance of the filing season. However, CMS officials responsible for the FFM told us that the availability of IRS systems for testing was not a problem for them. They stated that CMS did not have the resources to send both monthly and annual reporting in January. The CMS officials explained that CMS may experience similar challenges next year. They said that, although the resource constraints were in part related to the first-year development of the information technology systems, the volume of processing needed to transmit both monthly and annual reports in January presents a longer-term challenge.

Delays in IRS processing of marketplace EPD submissions also contributed to IRS having incomplete marketplace information available for AVS matching with tax returns for most of the filing season. According to IRS officials, once IRS receives the marketplace submissions, IRS must process the data to make them available for matching. IRS officials told us that IRS processing of the data submissions it received in February was delayed because IRS needed to implement an internal technical system change during that time. Therefore, complete data from the majority of marketplaces was not available for matching until the last week in March 2015. Specifically, as of March 21, 2015, according to IRS documentation, IRS had processed and made available for verification of taxpayer PTC claims complete coverage data for the entire January 2014 to December 2014 tax year for 4 of the 51 marketplace states. Incomplete data, which did not include data for the month of December 2014, were processed and available for 38 marketplace states. For the remaining 9 marketplace states, no usable 2014 EPD information was processed and available for PTC verification. The marketplace data that were processed and available to IRS for matching as of March 21, 2015, provided PTC information on approximately 3.1 million tax households; IRS expected that about 4.4 million tax households would be represented once the marketplace information was complete. In late March 2015, according to IRS documentation, it had processed additional EPD files to make them available for matching so that, as of March 29, 2015, IRS had complete 2014 EPD data available for 46 of the 51 marketplace states, but it had incomplete data for two states and no EPD data for the other three states. As of July 7, 2015, IRS reported it had complete 2014 data available for 50 marketplace states and incomplete data for one state.

Even though IRS did not have complete tax year 2014 EPD information available for verification of taxpayer PTC claims, it was able to begin enforcing PTC compliance at the start of the 2015 filing season in January 2015. IRS implemented contingency plans—such as using other available data and corresponding with taxpayers—to compensate for missing marketplace data. Although these contingency processes enabled IRS to process tax returns with PTC claims without complete marketplace data, the processes did not fully mitigate the impacts on taxpayers. In the absence of complete EPD from all marketplaces, early in the filing season IRS suspended processing more than 24,000 tax returns for a week or more. In prior work we found that using the correspondence process for resolving discrepancy cases imposes a burden on taxpayers as it requires them to provide documentation in response to IRS’s post-filing notices and then wait for IRS to communicate the results of its review. We also previously found that this often results in a lengthy process during which, in a substantial portion of cases, refunds are delayed until the audit issues are resolved.

To help mitigate challenges faced by taxpayers affected by delayed or inaccurate Forms 1095-A, Treasury issued guidance providing various types of penalty relief. In addition, IRS issued guidance to taxpayers affected by delayed and inaccurate Forms 1095-A. For example, taxpayers who filed their returns based on the first Form 1095-A they received (i.e., prior to notification from the marketplace that the form was incorrect) were informed that they were not required to file an amended return once they received the corrected form, unless the updated marketplace information indicated that they were not actually enrolled in a qualified plan or were otherwise ineligible for the PTC. Taxpayers who had received the initial Form 1095-A but not the corrected one they were expecting were advised to file by April 15, 2015, using either the initial form or the corrected Form 1095-A, if available. Taxpayers who had not received any Form 1095-A at all were instructed to request an automatic filing extension by April 15, 2015, and to then file their returns as soon as they received the form from the marketplace.

IRS’s goals include effectively enforcing compliance with tax laws, reducing taxpayer burden, and encouraging voluntary compliance. As discussed above, it is unclear whether the challenges IRS faced in getting complete and accurate data from the marketplaces in time to conduct pre- refund verification of taxpayer PTC claims were a 1-year problem or if they will be ongoing. Without understanding the challenges that may be ongoing, the effects of the problem and options for correcting it, IRS is missing information that could help it design contingency plans to efficiently and effectively process tax returns with PTC claims while mitigating the burden on taxpayers.

Additional Authority Could Improve Efficiency of Processing Taxpayer PTC Claims, If Marketplace Data Are Complete and Accurate

Even with complete marketplace information, IRS is faced with contacting taxpayers for additional documentation or opening an examination to resolve discrepancies between PTC information on tax returns and the marketplace data. In cases of a discrepancy with the marketplace data, IRS does not have the authority to automatically correct the tax return and simply notify the taxpayer of the change, as it does in other circumstances where math error authority applies.submitted legislative proposals for fiscal years 2015 and 2016 that, among other things, would establish a category of correctable errors. Under the proposals, Treasury would be granted regulatory authority to The administration permit IRS to correct errors in cases where information provided by a taxpayer does not match corresponding information provided in government databases. Congress has not granted this broad authority. IRS’s goals include effectively enforcing compliance with tax laws while reducing taxpayer burden and encouraging voluntary compliance. Correctable error authority could help IRS meet its goals for timely processing of tax returns, reduce the burden on taxpayers of responding to IRS correspondence, and reduce the need for IRS to resolve discrepancies in post-refund compliance, which, as we previously concluded, is less effective and more costly than at-filing compliance.

IRS has not sought correctable error authority specific to correcting errors in cases where information provided by a taxpayer does not match corresponding marketplace information. Correcting tax returns at-filing based on marketplace data would not depend on IRS accelerating deadlines for information returns because—unlike some other information returns, such as the Form W-2—marketplace data are due to IRS early in the filing season. Furthermore, IRS is already using the marketplace information for pre-refund matching. However, given the problems with the completeness and accuracy of the marketplace data IRS had available to verify PTC information on 2014 tax returns, if IRS were granted correctable error authority, it would be important that the third- party data used for matching are complete and accurate.

IRS Does Not Yet Have Complete Information for PTC Oversight

IRS and CMS each have oversight responsibilities for the administration of the advance PTC. IRS is responsible for enforcing tax laws and determines filing requirements. IRS requires recipients of advance PTC payments to file tax returns and to accurately report those payments on their tax return. According to IRS officials, IRS and CMS are part of an interagency working group assessing the risk for improper payments from the PTC account and CMS is responsible for overseeing the marketplaces and for the risk assessment for the advance PTC payments. However, IRS does not have complete information that would help support its oversight responsibilities. Because marketplace data are incomplete, CMS has not provided IRS the total amount of advance PTC payments made for 2014 marketplace policies. Unless CMS shares complete and accurate information on advance PTC payments made to health insurers, IRS will not know the size of the gap between the payments made and payments reported. Without knowing the size of this gap, IRS does not know the extent of noncompliance with the requirement for recipients of advance PTC payments to accurately report those payments on their tax return, a measure that could help IRS assess the effectiveness of its education, outreach, and compliance efforts. Although IRS does not know the size of the gap, it has preliminary information on the total advance PTC payments made and total advance PTC payments reported by taxpayers, as follows.

Total advance PTC payments made. According to CMS data, in 2014, advance PTC payments totaled almost $15.5 billion. Because some advance PTC payments made in 2014 could be for 2015 policies and some payments made in 2015 could be for adjustments to 2014 policies, the amount paid during 2014 does not indicate the precise amount of advance PTC that was paid for 2014 policies and should be reconciled on 2015 tax returns. CMS and the marketplaces are required to provide these data to IRS through EPD and 1095-A data. But, as discussed above, they have not yet provided complete and accurate data to IRS for advance PTC payments made for coverage year 2014. Until it receives complete and accurate marketplace data, IRS does not know the baseline for the total amount of advance PTC that taxpayers should have reported on 2014 tax returns.

Total advance PTC payments reported by taxpayers. IRS expected 4.4 million taxpayers to file PTC claims for the 2014 tax year. As of May 28, 2015, 2.8 million filers had reported advance PTC payments totaling almost $10.1 billion on their tax returns (see table 3). Approximately 2.6 million filers had calculated and claimed PTC based on their actual income and family size; these PTC claims totaled $8.9 billion. The number of filers claiming PTC was smaller than the number of filers reporting advance PTC because some taxpayers who reported advance PTC payments did not claim PTC. These taxpayers may have been eligible for advance PTC based on their estimated income, but ineligible for PTC based on the actual income reported on their tax return. According to preliminary IRS filing season data, as of May 28, 2015, more than half of taxpayers who received advance PTC had advance PTC greater than the PTC they claimed when they calculated it on their tax returns.

Working with CMS to obtain the total amount of advance PTC paid for tax year 2014 would better position IRS to determine the amount of the gap between advance PTC paid and advance PTC reported. Continuing to obtain this information and tracking such gaps in the future could also better position IRS to evaluate the effectiveness of its PTC education and compliance efforts.

IRS Finalized Most but Not All Forms and Guidance in Time for the Filing Season

IRS issued most, but not all, of the forms and guidance related to the shared responsibility and PTC provisions in time for the filing season. Leading up to the 2015 filing season IRS also issued several other types of guidance and information for taxpayers and tax preparers on the PTC and shared responsibility provision filing and payment requirements. These included publications, brochures, e-mail bulletins, extensive website information, videos, and webcasts. During the filing season IRS also issued multiple updates to guidance for claiming coverage exemptions related to the shared responsibility provision.

Although IRS finalized Form 8965, Health Coverage Exemptions, and the Form 8965 instructions by December 2014, IRS subsequently issued additional updates to the instructions, first in late January 2015 and then again in late February 2015. The January update clarified whether certain types of exemptions could be claimed on a tax return or must be granted by the marketplace. The February update clarified the requirements for claiming a coverage exemption for a gap in marketplace coverage during early 2014.

With respect to PTC guidance, IRS did not finalize some key PTC-related instructions in time for tax software developers, taxpayers, and tax preparers to have complete information at the beginning of the 2015 filing season. Specifically, IRS did not release Publication 974, Premium Tax Credit, until late February 2015. The publication released in February included several worksheets some taxpayers needed to compute their PTC, but did not cover certain other situations taxpayers may face. To incorporate guidance for those additional scenarios, IRS released an updated version of Publication 974 on March 30, 2015. According to IRS, this publication was delayed due to the high-level coordination with Treasury, Chief Counsel, and business units and IRS’s Services and Enforcement Affordable Care Act Office. Stakeholders representing tax software developers and return preparation services told us that the delay was problematic because software developers were unable to finalize programming for the worksheets that taxpayers would need to calculate both the self-employed health insurance deduction and PTC.

IRS officials told us that developing the guidance as part of the first year of implementing PTC requirements was very complicated and they do not expect subsequent annual updates to take as much time.

IRS Is Tracking Filing Season Statistics for the Shared Responsibility and Premium Tax Credit Provisions and Plans to Evaluate Establishing Performance Goals and Measures in the Future

IRS’s preliminary efforts to evaluate performance for the shared responsibility and PTC provisions have involved tracking statistics and developing a high-level strategic roadmap to align strategic goals, objectives, and measures. Consistent with performance management principles related to using actual performance information to establish a performance measurement system, IRS is tracking key statistical measures related to reporting on compliance with health care coverage requirements and processing tax returns claiming PTC. IRS plans to analyze these data and other performance information following the 2015 filing season. Consistent with performance management leading practices, IRS’s strategic roadmap aims to ensure alignment of Patient Protection and Affordable Care Act (PPACA) strategic goals, objectives, and measures at the program and agency-wide levels.

Collection and analysis of performance data. IRS considers the 2015 filing season—when taxpayers file their 2014 returns—a baseline in terms of identifying tax return processing issues and taxpayer behaviors associated with the new individual PPACA provisions. According to IRS officials, analyzing statistics for first-year implementation in these areas may help IRS establish the basis for defining specific performance goals and measures for assessing the effectiveness of SRP and PTC implementation, as appropriate, in the future. Some examples of statistics IRS is tracking include the following:

The volume of returns claiming health care coverage, an exemption from coverage, and silent returns.

The volume and dollar amounts associated with tax returns claiming PTC, including whether or not the taxpayer reported receiving an advance PTC.

The extent to which repayments of excess advance PTC are limited by the statutory cap.

The volume of different types of math errors and third-party discrepancies identified through matching of PTC claims to marketplace data.

IRS also identified 32 different research priorities, which may help it develop performance goals and measures for the shared responsibility and PTC provisions in the future, if IRS determines that provision-specific measures are appropriate. These research priorities include examining taxpayers’ behavior related to the advanced PTC reconciliation process, as well as characteristics of taxpayers who self-assessed the SRP or filed silent returns. IRS plans to use the results of its evaluations of taxpayer behavior to help inform IRS compliance initiatives such as IRS’s taxpayer education efforts.

According to IRS officials, IRS has not typically defined performance goals specific to new legislative requirements such as the shared responsibility and PTC provisions, but instead incorporated monitoring of new requirements into overall performance goals. Agency officials stated that they will evaluate whether this would be appropriate for SRP and PTC once they have analyzed operational baseline data from the first year of implementing these provisions.

IRS’s initial efforts to build toward defining specific goals and measures for implementing the SRP and PTC provisions are consistent with performance management principles related to using actual performance information to establish a performance measurement system. We have reported on the importance of agencies using performance information to help identify problems in existing programs, as well as the causes of problems and potential corrective actions. The principles described in our prior work and the Government Performance and Results Act Modernization Act of 2010 (GPRAMA) can serve as a framework of leading practices that may be applied at the PPACA program level, including implementation of the individual shared responsibility and PTC provisions.

Alignment of goals, objectives, and measures. IRS articulated the early vision for implementing PPACA requirements through its Strategic Roadmap, issued in January 2012. The Roadmap described a high-level vision for implementation of all PPACA provisions and included broad goals and objectives that were aligned with IRS’s strategic goals and objectives. It outlined a phased approach for continued refinement of the core capabilities and specific initiatives that would help IRS achieve its goals, specifically: defining mission, vision, and guiding principles; defining goals, objectives, and capabilities; conducting gap analysis and identifying next steps; developing the roadmap; reviewing and refining capabilities; and prioritizing capabilities.

Following the issuance of its Strategic Roadmap, IRS moved forward in preparation for implementing PPACA by focusing on five core capability areas that would enable it to meet its objectives: governance and planning, pre- and at-filing operations, compliance, customer service, and stakeholder relations. IRS expanded its planning for PPACA implementation in each core area through the development of high-level action plans and cross-cutting collaborative efforts that involved the IRS divisions and units that would be responsible for implementing specific PPACA-related processes. The high-level action plans generally addressed implementation of multiple PPACA provisions, although some portions focused on defining processes related to PTC, such as the annual redetermination of eligibility for the advanced PTC.

More recently, IRS demonstrated its continued recognition of the importance of aligning performance goals and measures for PPACA. While IRS has not yet defined specific performance goals and measures related to the shared responsibility and PTC provisions, in its preliminary 2015 ACA Filing Season Status Reports, IRS identified tentative linkages between agency-wide strategic goals and the preliminary shared responsibility and PTC-related high-level statistics that are being monitored.

In planning for implementation of PPACA requirements, IRS followed performance management leading practices related to aligning agency- wide strategic goals, objectives, and measures with program-level goals and measures. For example, IRS’s Strategic Roadmap described the linkages between the strategic goal of supporting voluntary compliance while protecting the tax system from fraud and other noncompliance and objectives including the use of data-driven strategies to continuously enhance prevention, detection and treatment of fraud and abuse. In our prior work, we found that aligning agency-wide goals, objectives, and measures is another leading practice that can enhance or facilitate the use of performance information for management decision making.alignment should reflect a cascading or hierarchical linkage moving from top management down to the operational level.

IRS Is Not Evaluating Its Efforts to Coordinate and Communicate with Key Stakeholders, Which May Pose Challenges for Implementing New Requirements for Tax Year 2015

Successful implementation of the PTC and individual shared responsibility tax provisions requires IRS collaboration with CMS and the marketplaces. It also requires communication with other stakeholders, such as tax software companies, employers, and health insurers. IRS worked to collaborate and communicate with external stakeholders to implement PPACA requirements for tax year 2014. For example, IRS and CMS developed written guidance and agreements that describe common goals and lay out standards and timelines for IRS and the marketplaces to provide key information to one another, including the EPD transmissions and Form 1095-A information. Further, SBM officials we talked to reported that, overall, IRS provided excellent technical support. For example, marketplace officials told us that IRS coordinated with them through regular, frequent meetings, webinars, training sessions, and office hours that covered security, technical, and policy issues. IRS also provided the marketplaces with documentation of technical requirements for the submission of EPD and Form 1095-A information and project plans with timelines. Officials from two marketplaces said IRS was flexible and worked with them regarding timelines for testing data transmissions.

Despite these efforts, external stakeholders we spoke with reported some challenges with IRS collaboration and coordination efforts related to implementation of the PPACA provisions for tax year 2014. As previously discussed, IRS experienced challenges in obtaining timely, complete, and accurate information from the marketplaces and in providing timely guidance to taxpayers and tax preparers. Three of the five SBMs we spoke with told us that limited availability of IRS systems for marketplaces to test monthly data transmissions was a challenge. Other stakeholders we spoke with, including associations representing tax preparers and tax software developers, also said that late forms, instructions, and guidance created challenges in helping their clients with the new PPACA requirements.

IRS initially planned to assess the effectiveness of its efforts to collaborate and communicate with key external stakeholders for the implementation of the 2014 PPACA requirements. This assessment was to help inform IRS efforts for the implementation of the 2015 requirements. However, IRS has not made progress on that assessment. Initial IRS performance plans included plans to assess IRS coordination with different types of external stakeholders. Also, IRS officials told us that an important area for post-filing analysis involves reviewing the effectiveness of key external stakeholder relationships, such as coordination with the state health insurance marketplaces. In prior work we identified key practices that can help sustain collaboration among agencies, including developing mechanisms to evaluate the results of IRS received feedback on collaboration efforts on collaborative efforts.an ad hoc basis from at least one external stakeholder group. However, IRS did not solicit such feedback in a comprehensive way and IRS does not have a documented plan, with timelines, for assessing the effectiveness of its efforts to collaborate with key external stakeholders. In March 2015, officials from IRS’s Services and Enforcement Affordable Care Act Office told us that they plan to discuss with SBM officials which aspects of the first year implementation of PPACA requirements went well and which processes could be improved. IRS identified this as part of its plan to catalog lessons learned during the first year of implementation of the shared responsibility and PTC provisions to help improve future coordination with the states. However, as of May 1, 2015, IRS had not initiated any analysis in this area and IRS officials did not indicate when they expect to initiate this analysis.

Without an assessment of its efforts to collaborate and communicate with key external stakeholders, challenges in implementing the 2014 PPACA requirements that relied on these groups could also affect new requirements taking effect in 2015.opportunities for improving return processing and taxpayer experience related to the shared responsibility and PTC provisions, it is not evaluating its collaboration efforts. The new requirements—listed below— affect a broader group of stakeholders, including health insurers and certain employers, and IRS is developing new systems and guidance to implement the requirements. Some external stakeholders we spoke with raised concerns about the readiness of IRS and stakeholders to implement the new requirements smoothly.

New health coverage reporting requirements. As of April 3, 2015, IRS’s ACA Enterprise Risk Register listed delays to the information return program as significant, ongoing risks based on the readiness of reporting entities and delays in the IRS guidance for software developers. According to IRS officials, although larger software developers will be able to accommodate changes on shorter time frames, smaller software developers may have more challenges. Several stakeholders told us that they need finalized forms and guidance at least 12 months in advance to be able to develop the software they will need to track and report information. However, IRS has not yet finalized guidance for Forms 1095-B and 1095-C that insurers and large employers, respectively, will be required to file starting with the 2016 filing season. IRS issued instructions for these new information returns in early February 2015. However, the instructions for these forms are incomplete. The instructions for insurer reporting do not list the due date for insurers to provide the form to covered individuals. Furthermore, the instructions for both the insurer and employer returns lack information on the process to be used for issuing corrected forms if needed, indicating that this information is “Reserved.” IRS officials told us that they are updating the forms and instructions for tax year 2015 and that the updated instructions will list the due dates. As of June 2015, Publication 5165, Guide for Electronically Filing Affordable Care Act Information Returns for Software Developers and Transmitters, was also still under development. This guidance is to provide software developers and electronic transmitters of these returns specific protocols, formats, business rules, and validation procedures. IRS issued a draft version of Publication 5165 on April 25, 2015, and an updated draft on June 9, 2015. The draft version of the publication includes information on issuing corrected forms. As of the end of May, IRS expected to begin testing the electronic submission process for the information returns with external organizations in July 2015.

Marketplace exemption reporting. If the marketplaces are unable to process exemption applications and report exemption information to IRS in a timely way, IRS will not have some of the information it needs to verify taxpayer exemption claims for tax year 2015. Stakeholders told us that the paper-based marketplace exemption process is complex and cumbersome. Furthermore, SBMs that had the FFM process their exemption applications and submit exemption information to IRS for the 2014 coverage year are required to process exemptions and submit the information on their own beginning in 2016. Officials from one of the five SBMs we spoke with said that marketplace would establish a system for processing exemptions once more information was available from CMS. But at the time we spoke with the officials in January 2015, CMS had not provided this guidance. As of late April 2015, IRS was also unable to provide this information. In July 2015, HHS officials told us that HHS plans to release guidance relieving the SBMs of exemption reporting for 2016.

Information on advance PTC recipients who fail to file a tax return. Marketplace officials we interviewed said that IRS needs to clarify how it will provide information to the marketplaces about whether or not an individual who received advance PTC in the past filed a tax return, as required. The marketplaces will need this information because individuals who receive advance PTC and fail to file a tax return reporting their advance PTC are ineligible for future advance PTC payments. In May 2015, IRS officials told us that they began discussing this issue with CMS officials in early March 2015, and that they also plan to meet with the SBMs. IRS officials said they expect to be able to provide information to the marketplaces to implement this provision by August 31, 2015, in time for the 2016 coverage year marketplace open season.

IRS Implemented 13 of 15 Prior GAO PPACA-Related Recommendations

IRS has implemented 13 recommendations we previously made to IRS related to the implementation of PPACA provisions. Table 4 summarizes the recommendations implemented by IRS.

Two of our other PPACA-related recommendations to IRS remain open, though IRS has made some progress in implementing them. As shown in table 5, IRS implementation of these recommendations would foster accountability and provide information to help budget decision makers.

Conclusions

Implementation of the new PPACA tax provisions for tax year 2014 was a broad and complex undertaking. IRS developed new systems, processes, forms, instructions, and educational materials and worked closely with external stakeholders to facilitate implementation of the shared responsibility and PTC provisions. However, IRS experienced various challenges related to the availability of complete and accurate marketplace data and taxpayer compliance with the new requirements. Additional IRS actions could help improve IRS oversight of these tax provisions.

Assessing the costs and benefits of options for addressing taxpayer noncompliance with the requirements of the shared responsibility provision in the 2016 filing season would help IRS determine what compliance actions would best support its goals to encourage voluntary compliance while enforcing the law with integrity and fairness to all.

Determining whether problems with the marketplaces providing—and IRS using—complete, timely, and accurate marketplace data was a first-year challenge that is unlikely to recur or if those problems are a longer-term challenge would help IRS plan for processing tax returns with PTC claims for future tax years. If the problems are expected to be an ongoing challenge, assessing their effects and correction options would help IRS better target contingency plans and assess the trade-offs among any correction options.

Assessing whether or not the data received from the marketplaces are sufficiently complete and reliable would help IRS better understand the potential benefits and risks of using the data to correct tax returns at filing. The administration has requested that Congress give IRS broad authority to correct tax returns based on matching with government databases. However, Congress has not granted that authority. If an IRS assessment of the marketplace data determined that corrections based on matching with those data would be effective, seeking more specific authority to make such corrections at the time of filing for tax returns with PTC claims could reduce the cost and burden of needing to use the correspondence process to resolve discrepancies. It also would be an effective first step in demonstrating the benefits of correctible error authority.

Establishing as a baseline the aggregate amount of the gap between the advance PTC paid and advance PTC reported for the 2014 tax year, and tracking this statistic in future years, would help IRS evaluate the overall effectiveness of the measures it takes to educate taxpayers and tax preparers about the requirements of the PTC tax provision, as well as the effectiveness of its PTC compliance strategy.

Evaluating its efforts to collaborate and communicate with key external stakeholders, such as CMS, the marketplaces, tax software companies, and employers would help IRS assess whether changes to its collaboration and communication practices could help it avoid the kinds of challenges it faced in tax year 2014 as it implements the new PPACA provisions in tax year 2015. Without such an evaluation, IRS increases the risk of problems implementing the 2015 requirements that rely on IRS coordination and communication with key stakeholders.

Recommendations for Executive Action

To strengthen oversight of the individual shared responsibility and premium tax credit provisions, we recommend that the Commissioner of Internal Revenue take the following five actions:

Assess the costs and benefits of compliance options, such as soft notices, that could be used beginning in the 2016 filing season to address the problem of tax returns that do not include at least one of the following: indication of full-year health care coverage, claim of an exemption from the requirement to have coverage, or report of a shared responsibility payment, as required.

Assess whether the challenges in getting complete and accurate marketplace data in time to conduct pre-refund verification of taxpayer PTC claims are a single year or an ongoing problem and, if they are an ongoing problem, assess the effects of the problem and options for correcting it.

Assess whether or not the data received from the health insurance marketplaces are sufficiently complete and accurate to enable effective correction of tax returns at-filing based on matching with the marketplace data and, if the assessment determines that such corrections would be effective, seek legislative authority to correct tax returns at-filing based on the marketplace data.

Work with CMS to get the total amount of advance PTC paid for the 2014 tax year and establish, as a baseline, the aggregate amount of the gap between advance PTC paid and advance PTC reported for the 2014 tax year, and track this aggregate gap for future tax years to help in evaluating the effectiveness of IRS’s PTC education and compliance efforts.

Evaluate IRS efforts to collaborate and communicate with key external stakeholders to inform efforts related to implementation of the new 2015 PPACA requirements.

Agency Comments and Our Evaluation

We provided a draft of this report to the Commissioner of Internal Revenue and the Secretary of Health and Human Services for comment. IRS provided written comments on a draft of the report, which are reprinted in appendix II. IRS and HHS also provided technical comments, which we incorporated, as appropriate.

IRS generally agreed with our recommendations. IRS agreed with four of our five recommendations and agreed in part with our recommendation to work with CMS to get the total amount of advance PTC paid for the 2014 tax year and establish, as a baseline, the aggregate amount of the gap between advance PTC paid and advance PTC reported for the 2014 tax year, and track this aggregate gap for future tax years. IRS agreed to analyze reporting of advance payments of the PTC by the marketplaces. According to IRS, the results of this analysis and other efforts will help inform the IRS of potential areas for improvement in education, tax filing, and compliance activities. We continue to believe IRS should track the aggregate gap between advance PTC paid and advance PTC reported.

We are sending copies of this report to the appropriate congressional committees, the Commissioner of Internal Revenue, the Secretary of the Treasury, the Secretary of Health and Human Services, 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 or wish to discuss the material in this report further, please contact me at (202) 512-9110 or at mctiguej@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 III.

Appendix I: Objectives, Scope, and Methodology

The objectives of this report are to (1) assess what the Internal Revenue Service (IRS) has done and plans to do to implement the premium tax credit (PTC) and individual shared responsibility tax provisions; (2) determine the extent to which IRS goals for these tax provisions are linked to performance measures to evaluate program success; (3) assess IRS collaboration with government and private sector entities to implement and enforce these tax provisions; and (4) describe IRS’s progress in implementing our past recommendations on Patient Protection and Affordable Care Act (PPACA) implementation.

To address these objectives, we reviewed IRS plans and processes, including tax forms, instructions, and guidance; the Services and Enforcement Affordable Care Act Office Project Management Plan and Affordable Care Act Strategic Roadmap; and relevant laws and Department of the Treasury regulations. For information on key IRS information technology systems, we drew on information from our recent We also reviewed Department of Health and Human work on this issue.Services’ Centers for Medicare & Medicaid Services (CMS) reports and planning documents on marketplace enrollment and disbursements of advance PTCs. We interviewed officials from IRS, CMS, the Information Reporting Program Advisory Committee—an IRS advisory group made up of tax professionals—and nongeneralizable samples of five State- based Marketplaces (SBM) and eight external stakeholder groups. We selected marketplaces and external stakeholder groups to get a variety of perspectives. The SBMs we selected varied by number of enrollees and by the percentage of enrollees with financial assistance. We also selected the only SBM that processed its own 2014 exemption applications, one SBM for which the Federally-facilitated Marketplace (FFM) reported 2014 marketplace enrollment information to IRS, and one SBM that reported its own enrollment information for 2014 but switched to using the FFM for 2015. To get a variety of perspectives from external stakeholders, we selected groups representing tax software companies, tax preparers, employers, and taxpayers—including a group representing taxpayers broadly and a group focused on serving low-income taxpayers. We analyzed preliminary summary IRS 2015 filing season data related to the premium tax credit and individual shared responsibility provisions. We assessed the reliability of the data by reviewing related documentation, testing the data for errors, and interviewing IRS officials. We determined that the data were sufficiently reliable for the purposes of this report. We assessed IRS implementation activities and plans using IRS goals as criteria. We assessed IRS efforts to collaborate with partner agencies and key external stakeholder groups using criteria from IRS goals and plans as well as criteria on interagency collaboration reported in our prior work. These criteria include establishing (1) mutually reinforcing or joint strategies, (2) compatible policies and procedures to operate across agency boundaries, and (3) written guidance and agreements. We assessed IRS performance goals and measures for implementation of the PPACA individual shared responsibility mandate using criteria on leading practices for performance management described in our prior work and drawing from the broad agency performance requirements under the Government Performance and Results Act Modernization Act of 2010.

We conducted this performance audit from July 2014 to July 2015 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: Comments from the Internal Revenue Service

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact:

Staff Acknowledgments:

In addition to the individual named above, Jeff Arkin, Assistant Director; Susan E. Murphy, Ellen Rominger, Amy Bowser, Stephanie Chen, Nina Crocker, John E. Dicken, Raheem Hanifa, Maria Hasan, Sherice Nelson, Robert Robinson, and Cynthia Saunders made key contributions to this report.