«Affordable Care Act: Controls Over Financial Accounting for the Premium Tax Credit Should Be Improved March 2, 2016 Reference Number: 2016-13-021 ...»
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Affordable Care Act: Controls Over Financial
Accounting for the Premium Tax Credit
Should Be Improved
March 2, 2016
Reference Number: 2016-13-021
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process
and information determined to be restricted from public release has been redacted from this document.
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HIGHLIGHTSthe actual PTC amount based on income and
AFFORDABLE CARE ACT: CONTROLSnumber of dependent deductions reported on
OVER FINANCIAL ACCOUNTING FORthe taxpayer’s Federal tax return. The errors we
THE PREMIUM TAX CREDIT SHOULD BEidentified were due to a programming
IMPROVEDmiscalculation. The miscalculation was not caught due to insufficient testing of the financial Highlights system programming developed to account for the impact of the reconciliation of PTC fund outlays (disbursements).
Final Report issued on March 2, 2016 Due to this programing error, the IRS Highlights of Reference Number: 2016-13-021 understated the amount of PTC disbursements to the Internal Revenue Service Chief Financial and overstated the balance in the IRS PTC Officer. account by $447 million. Further, the error TIGTA identified in the financial accounting IMPACT ON TAXPAYERS records, if left uncorrected, would have resulted in a misstatement of the Fiscal Year 2015 IRS The Patient Prot
This report presents the result of our review to evaluate the Internal Revenue Service (IRS) financial accounting controls for the Premium Tax Credit (PTC). This review was initiated as the result of a congressional request to review the administration of the PTC. This review is included in our Fiscal Year 2016 Annual Audit Plan and addresses the major management challenge of Implementing the Affordable Care Act and Other Tax Law Changes.
Management’s complete response to the draft report is included as Appendix V.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. If you have any questions, please contact me or Gregory D. Kutz, Assistant Inspector General for Audit (Management Services and Exempt Organizations).
Affordable Care Act: Controls Over Financial Accounting for the Premium Tax Credit Should Be Improved
Results of Review
The Internal Revenue Service Did Not Accurately Track and Report Premium Tax Credit Outlays
Additional Steps Are Needed to Ensure That Advance Premium Tax Credit Payment Financial Accounting Information Is Accurate
Appendices Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measure
Appendix V – Management’s Response to the Draft Report
Affordable Care Act: Controls Over Financial Accounting for the Premium Tax Credit Should Be Improved
Refundable tax credit created by the Affordable Care Act The Patient Protection and Affordable Care Act (hereafter referred to as the ACA)1 created a new refundable2 tax credit, the Premium Tax Credit (PTC), to assist eligible taxpayers with paying their health insurance premiums. Funding for the PTC is provided by a permanent indefinite appropriation to the Department of the Treasury.3 The ACA also created the Health Insurance Marketplace (hereafter referred to as the Marketplace). The Marketplaces are where individuals (and their families) find information about health insurance options, purchase qualified health plans, and, if eligible, obtain help in paying premiums. According to the U.S. Department of Health and Human Services, as of February 2015, qualified health plans selections and automatic reenrollments were 11.7 million.
When enrolling in a qualified health plan4 through the Marketplace, eligible individuals can choose to have some or all of the PTC paid in advance to their health insurance company as payment of their monthly premium (hereafter referred to as the Advance Premium Tax Credit or APTC). Alternatively, individuals can pay the premium and wait to claim all of the PTC on their Federal income tax return.
Implementation of the APTC payment The Centers for Medicare and Medicaid Services (CMS)5 oversees implementation of certain ACA provisions related to the Marketplace. The CMS operates the Federally Facilitated Marketplace and works with the States to establish State partnership Marketplaces, including overseeing their operations. The Marketplaces have responsibility for determining if an individual is eligible to purchase health insurance through the Marketplace as well as determining the amount of the APTC they are eligible to receive. Total APTC disbursements6 1 Pub. L. No. 111-148, 124 Stat. 119 (2010) (codified as amended in scattered sections of the Internal Revenue Code and 42 U.S.C.), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029.
2 Refundable tax credits can be used to reduce a taxpayer’s tax liability to zero. Any excess of the credit beyond the tax liability can be refunded to the taxpayer.
3 The Internal Revenue Service has implemented the PTC program on behalf of the Department of the Treasury.
4 A qualified health plan is an insurance plan that is certified by the Health Insurance Marketplace and provides essential health benefits, follows established limits on cost-sharing (like deductibles, copayments, and out-of-pocket maximum amounts), and meets other requirements.
5 The CMS has implemented the PTC program on behalf of the Department of Health and Human Services.
6 Disbursements are amounts paid by Federal agencies, by cash or cash equivalent, during the fiscal year to liquidate Government obligations.
Page 1 Affordable Care Act: Controls Over Financial Accounting for the Premium Tax Credit Should Be Improved for Fiscal Year (FY) 20147 were nearly $11 billion ($15.5 billion in Calendar Year 2014).
These disbursements went to 291 health insurance issuers. The IRS reported that as of September 30, 2015, total credits claimed on 2014 tax returns totaled $9.8 billion.
Once a Marketplace determines the amount of the APTC an individual is eligible to receive, the individual then elects the amount to be sent to their health insurance issuer on a monthly basis.
The CMS subsequently sends a request to the Department of the Treasury’s Bureau of the Fiscal Service8 to issue monthly APTC payments to the individual’s health insurance issuer. These payments are certified by the CMS and paid from an allocation account9 established for the use of the CMS.
Reconciliation of the PTCs Ultimately, the Internal Revenue Service (IRS) is responsible for determining the amount of the PTC a taxpayer receives based on his or her tax return. All individuals who chose to have APTC payments sent to a health insurance issuer are required to file a Federal tax return to reconcile the APTC with the actual PTC they are eligible to receive.10 This reconciliation is necessary because a Marketplace’s computation of the APTC is based on estimates of an individual’s anticipated income and family size for the upcoming calendar year. The amount of the PTC that taxpayers are entitled to receive is based on their actual income and family size (number of exemptions) as reported on their annual Federal tax return, which may be different from the estimates used by the Marketplace to determine the allowable APTC.
The ACA requires Marketplaces to provide the IRS with information regarding individuals enrolled in a Marketplace Exchange on a monthly basis (referred to as Exchange Periodic Data or EPD). This information includes monthly (and year-to-date cumulative) amounts of the APTC paid to health insurers on behalf of taxpayers. During the Calendar Year 2014 health insurance enrollment period, the District of Columbia and 14 States operated their own Exchanges, while the remaining 36 States partnered with the Federal Exchange which constitutes the Marketplace. In addition, the Marketplaces provide an annual summary to both the IRS and 7 For FY 2014, APTC disbursements began in January 2014. A fiscal year is any yearly accounting period, regardless of its relationship to a calendar year. The Federal Government’s fiscal year begins on October 1 and ends on September 30.
8 A new bureau of the Department of the Treasury formed from the consolidation of the Financial Management Service and the Bureau of the Public Debt. Its mission is to promote the financial integrity and operational efficiency of the U.S. Government through exceptional accounting, financing, collections, payments, and shared services.
9 Allocation accounts are authorized and appropriate when a law requires funds that are appropriated to one department to be transferred to pay for activities that are the statutory responsibility of a second department.
10 Taxpayers who enrolled in a qualified health plan through the Marketplace in Calendar Year 2014 will receive a Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace. Information from this form should be used to calculate the amount of the taxpayer’s PTC and reconcile the APTCs made on the taxpayer’s behalf to the health insurance issuer. To do this, the taxpayer will use Form 8962, Premium Tax Credit (PTC), when filing his or her tax return.
Page 2 Affordable Care Act: Controls Over Financial Accounting for the Premium Tax Credit Should Be Improved the enrolled individuals detailing specific information. This summary is referred to as Form 1095-A, Health Insurance Marketplace Statement.
Funding the PTC After significant planning and review, the IRS, Department of the Treasury, Department of Health and Human Services, the CMS, and the Office of Management and Budget (OMB) agreed that creating an allocation account for the CMS to use in obligating and disbursing funds for the APTC was the most logical and efficient approach to administering the PTC. As part of this approach, the CMS is responsible for certifying the availability of funds (via the allocation account) for APTC payments to health insurance issuers.
The CMS is also responsible for leading the Federal Marketplace, managing relationships with State Marketplaces, and providing oversight for the agents and brokers who enroll qualified individuals in qualified health plans and assist them in applying for the APTC. Under this approach, APTC payments will be captured in the “child” (allocation) account, and all reconciliation (refund) outlays will be captured in the “parent” account of the refund appropriation. The IRS is responsible for the unified reporting of all PTC appropriation activity on its annual financial statements.
Tracking PTC outlays with IRS financial systems The financial accounting for refundable tax credits is a complex multistep process. The PTC, as a refundable tax credit, is fully payable to the taxpayer even if the tax credit exceeds the tax liability, thereby providing greater economic benefit. The Department of the Treasury permanent Indefinite Refund Appropriation provides funding for the PTC. The Department of the Treasury account 20x0949 is used to track PTC funds within the IRS general ledger.
Accurately tracking the total outlays (disbursements) associated with the PTC involves two steps.
First, the IRS records monthly the summary amount of the fund outlay (APTC payments made by the CMS to health insurers) in its general ledger based on PTC reports provided by the CMS.
Second, the IRS records an adjustment to these outlays to reflect information on filed tax returns claiming the PTC. The overall objective of this two-part process is to allow the IRS to accurately record and report on the total amount of funding outlays associated with instances in which the total PTC exceeded the taxpayer’s liability.
Calculation of the PTC funds outlays adjustment This calculation is performed within the Individual Income Tax Credits (IITC) Report programming using taxpayer data extracted from the IRS Master File.11 The results of this
calculation are posted to the Redesigned Revenue and Accounting Control System (RRACS), which serves as the IRS’s general ledger for custodial accounting.
This review was initiated as the result of a congressional request for a review of the administration of the PTC. This report addresses the IRS’s controls over the financial accounting (hereafter referred to as accounting) of the PTCs. Our audit objective was limited to assessing the ability of the IRS to accurately calculate, record, and report the outlay (disbursement) amount associated with the PTC. We did not perform any detailed testing to evaluate the IRS’s efforts to ensure the accuracy of the underlying source information in the taxpayer’s record that the IITC Report programming used in calculating the FY 2015 PTC outlay (disbursement) amount. An evaluation of controls over the accuracy of this underlying support information is the subject of a separate Treasury Inspector General for Tax Administration (TIGTA) audit scheduled to be completed in FY 2016.