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. 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 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. 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.