Report: IRS Doing Well On Shared Responsibility Payments, Tax Credit Overpayments

A number of government investigative agency reports released in recent months have been quite critical of federal agency Affordable Care Act (ACA) implementation and management efforts. In a number of instances, these reports have resulted in congressional criticism or hearings. It is noteworthy, therefore, when an investigative report finds that in fact an ACA implementing agency is doing its job well.

On September 29, 2016, the Treasury Inspector General for Tax Administration (TIGTA) released a report entitled Affordable Care Act: With Minor Exceptions, Controls and Procedures for Collection of the Shared Responsibility Payment and Excess Advance Premium Tax Credit Were Effectively Established. The Report focuses primarily on Internal Revenue Service (IRS) collections of shared responsibility payments (SRPs) for 2014, but also addresses IRS recovery of advance premium tax credit (APTC) overpayments. The report is of particular interest because it explains how the IRS is collecting SRP obligations in light of the ACA’s prohibition against the IRS using its traditional tax enforcement tools such as liens, levies, or criminal prosecutions.

The report reveals that as of December 2015, 8.1 million taxpayers had reported $1.7 billion in SRPs on their filed 2014 tax returns. By that date, 94.5 percent of the taxpayers had either paid their SRPs or had their SRP obligation taken out of their tax refund. About $132 million (8 percent) of the amount owing remained to be collected. Approximately 30 percent of the taxpayers still owing SRPs had entered into installment agreements while 37 percent were still receiving collection notices or were subject to collection efforts. Twenty-eight percent of the cases, about 1.5 percent of the total, had been “recessed” as uncollectable (although they still remain subject to collection from future refunds).

Taxpayers who receive excess APTC must pay it back when they file their taxes. The repayment obligations of taxpayers with household incomes below 400 percent of the poverty level are capped, with the amount of the cap based on income and filing status and varying from $300 for a single taxpayer with income of less than 200 percent of the federal poverty level (FPL) to $2,500 for a family with an income of between 300 and 400 percent of the FPL. Taxpayers with household incomes exceeding 400 percent of the FPL must repay all APTC received. In contrast to the legal constraints the IRS faces in collecting SRPs, it has available the full panoply of remedies otherwise available for collecting delinquent taxes when it is pursuing repayment of excess APTC.

As of August 2015, 1.6 million taxpayers who had filed 2014 returns had received a total of $2 billion in excess APTC, $1.3 billion of which was required to be repaid after application of the statutory caps on repayment obligations. Taxpayers with incomes of less than 400 percent of the FPL represented 90 percent of the tax returns with excess APTC and were responsible for $844 million after the application of the statutory caps.

As of December 2015, 1.8 million taxpayers had filed returns with excess APTC of $1.6 billon required to be repaid. Four hundred seventy five thousand taxpayers had excess APTC not required to be repaid totaling $408,000. Only 39,000 taxpayers (2 percent of the total) had unpaid APTC assessments, totaling $43 million, 3 percent of the total. The IRS was pursuing liens or levies against 2,000 of these taxpayers, but in many cases the amounts owing were too small or the obligation too recent to have resulted in an enforcement action. Given the limited income of APTC recipients, I find a 98 percent repayment rate to be astonishing (although the report only includes taxpayers who filed tax returns and reconciled their APTC).

Taxpayers who owe the SRP and who fail to pay it with their tax return or have a refund sufficient to cover it will receive up to three notices from the IRS informing them that they have a balance due. They are charged interest on that balance. The TIGTA found that in every instance of an SRP liability, the balance due notice had been sent and interest was being assessed. As already noted, many taxpayers who owe SRPs have entered into an instalment plan, while others will have the balance collected from future refunds.

But the IRS treats SRP obligations differently from other tax obligations because of the legal limits it faces on collection. No penalties are assessed for nonpayment or late payment. Ordinarily, if a taxpayer has an installment agreement or offer in compromise from the IRS for unpaid tax obligations, the arrangement defaults if the taxpayer becomes delinquent on a new obligation. The IRS has decided not to default existing installment agreements or compromises for a new SRP debt. The TIGTA questioned this decision, but the policy in fact only affected 504 cases with tax compromises and about 25,000 cases with existing installment arrangements. About 77,000 taxpayers with existing installment arrangements voluntarily added their SRP to their installment agreement.

The TIGTA report found that IRS training, procedures, and controls for collection of SRPs were implemented in a timely fashion. It found, however, that because of the special procedures that the IRS uses for collecting SRPs, SRP liabilities were not always included in new, revised, or restored installment agreements of new offers in compromise and some SRP payment liabilities were prematurely moved to currently noncollectible status. It also found that some 2015 estimated tax payments were improperly applied to 2014 SRP liability due to uncorrected taxpayer errors. The IRS responded that it had corrected or is correcting all of the problems identified by the TIGTA.

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