IRS May Have Allowed Insurers to Escape Millions in Fees and Penalties
Policy + Politics

IRS May Have Allowed Insurers to Escape Millions in Fees and Penalties

REUTERS/Jonathan Ernst

The Internal Revenue Service may have allowed scores of insurers to avoid paying millions of dollars in taxes and penalties under a provision of the Affordable Care Act, according to a new report by a Treasury Department inspector general.

The ACA imposes an annual fee on health insurance providers taking part in the program to help fund the operations of Obamacare. It is up to the IRS to calculate the fee amount based on the insurers’ portion of the market share premiums. The assessed fees totaled $8 billion in fiscal 2014, but 143 insurers missed the April 15 deadline -- including seven that filed after the IRS had made the final fee assessments. 

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It wasn’t clear from the report how much in fees the seven insurance companies – known technically as “covered entities” – escaped paying by waiting until after the government had allocated the tax assessments to the other insurance companies. But taken together, the 143 late filers could face penalties of up to $4.9 million, according to the report.

“The lack of a reconciliation process allows covered entities that do not timely file required Forms 8963 to be exempt from paying their portion of the annual fee,” explained J. Russell George, the Treasury inspector general for tax administration. “This in turn results in covered entities that comply with the timely filing requirement paying more than their fair share.”

He said that improvements are needed to assure the accuracy of the allocation of the Health Insurance Provider Fee. While the IRS has done much to educate the insurers about the fee requirements, he wrote, there is still confusion and uncertainty over exactly how many insurers are subject to the tax because of conflicting data from the IRS and independent sources. 

Moreover, the IRS regulations don’t provide a remedial process to impose a tax on late filers once the final fee calculations are made and the letters go out. That means that firms that fail for whatever reason to file their tax forms essentially are excused from paying once they’re discovered because it simply would be too complicated or disruptive to reassess the fees for all insurers. “As a result, covered entities that file after the final fee calculation and distribution of the fee letters are not subject to their required portion of the fee,” according to George. 

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The inspector general recommended, among other things, that the IRS work with Treasury to amend the regulations to address this problem. However, IRS officials disagreed with this recommendation, stating, “Providing a reconciliation process would result in adjustments to the fee for the entire population of covered entities subject to the fee and would lead to a lack of certainty and finality as to their fee liability.”

The IRS is charged with enforcing key provisions of the health care law. That includes administering subsidies to low income people who enrolled on the Obamacare exchanges, as well as enforcing mandates by issuing tax penalties to those who don’t have health coverage.  A recent report from the Treasury inspector general revealed that the IRS was unable to verify that everyone who qualified for subsidies actually received them because of shortcomings in a data crosscheck tool.