The Internal Revenue Service has generally been able to identify potentially improper claims for Small Business Health Care Tax Credits by tax-exempt organizations and subject them to further review, but improvements are still needed to ensure the claims are being caught in time, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, found that during tax year 2012, tax exempt organizations claimed more than $73 million in Small Business Health Care Tax Credits that were provided for under the Patient Protection and Affordable Care Act. The IRS’s Tax Exempt and Government Entities Division has designed controls that systemically identify questionable credits for potential examination.
Since implementing these processes, the IRS said it has denied more than $1.5 million in credits that it had determined were improper. However, TIGTA noted that additional controls would provide further assurance that potentially improper claims for the tax credits are identified and addressed effectively and efficiently.
The Tax Exempt and Government Entities Division designed computer routines that identify potentially improper credits claimed by tax exempt organizations for possible examination prior to processing the tax returns before a refund is issued.
Between Jan. 1 and July 23, 2012, the Tax Exempt and Government Entities Division initiated pre-refund examinations for 43 percent of the potentially improper credits identified by its computer routines. But because the IRS does not conduct pre-refund examinations on all of the potentially improper credits, the IRS needs to focus its limited resources on the most productive pre-refund examinations.
However, TIGTA found that the Tax Exempt and Government Entities Division’s compliance plan for the Small Business Health Care Tax Credit did not include plans for periodically reviewing its computer routines to determine if any changes are needed based on the pre-refund examination results. In addition, the IRS does not have a post-refund compliance strategy for the tax credit.
After listening to TIGTA’s concerns, IRS officials indicated to the Inspector General that they have begun to analyze the outcomes of pre-refund examinations and initiated post-refund examinations as well.
On top of that, TIGTA determined that amended returns are not always subjected to the same level of review by the IRS as the original returns.
TIGTA recommended that the acting commissioner of the IRS’s Tax Exempt and Government Entities Division complete the work to analyze and document the outcomes of pre-refund examinations, complete post-refund examinations, periodically update the compliance plan for the credit, and ensure that amended returns are subjected to the same reviews as original returns.
In response to the report, IRS officials said they generally agreed with TIGTA’s recommendations and plan to take or have taken corrective actions.
“As explained during the course of the audit, all returns, both original and amended, are subject to examination selection criteria and either accepted as filed or selected for examination,” wrote Michael D. Julianelle, acting commissioner of the IRS’s Tax Exempt and Government Entities unit. “We agree that documenting how we applied the criteria to amended returns should be improved and we have already initiated corrective action as noted in the attached response.
Had the documentation occurred as stated in your recommendation, the five amended returns selected as samples which you identified as a potentially improper claim for the credit, would have indicated these were reviewed, considered for examination, and would not have been selected based on the results of the review.”
However, Julianelle added that the IRS did not agree with TIGTA’s outcome measure related to amended returns. “Your methodology implies that if the five identified returns had been systemically reviewed using the same process as original returns, the five returns would have been selected for examination,” he wrote. “However there is no certainty that any of the five would have been selected.
In addition, the outcome measure appears to be based on an assumption that if the five returns had been selected for examination, the result would be a one hundred percent denial of the credit amount claimed. However to date, approximately thirty percent of the credit amounts claimed on examined returns are disallowed.
Finally, your extrapolation of savings over five years does not take into account future changes to the statutory requirements to claim the Credit, notably the limitation that allows eligible small employers to claim the Credit for only two consecutive tax years beginning in TY14.”