IRS may have big ACA employer tax woes, advocate says

An official who serves as a voice for taxpayers at the Internal Revenue Service says the IRS may be poorly prepared to handle the wave of employer health coverage offer reports now flooding in.

The Affordable Care Act requires “applicable large employers” to use Form 1095-C to tell their workers, former workers and the IRS what, if any, major medical coverage the workers and former workers received. Most employers started filing the forms in early 2016, for the 2015 coverage year.

This year, the IRS is supposed to start imposing penalties on some employers who failed to offer what the government classifies as solid coverage to enough workers.

Nina Olson, the national taxpayer advocate, says the IRS was not equipped to test the accuracy of ACA health coverage information reporting data before the 2016 filing season, for the 2015 coverage year. The IRS expected to receive just 77 million 1095-C forms for 2015, but it has actually received 104 million 1095-C’s, and it has rejected 5.4 percent of the forms, Olson reports.

“Reasons for rejected returns include faulty transmission validation, missing (or multiple) attachments, error reading the file, or duplicate files,” Olson says.

Meanwhile, the IRS has had to develop a training program for the IRS employees working on employer-related ACA issues on the fly, and it was hoping in November to provide the training this month, Olson says.

“The training materials are currently under development,” Olson says. She says her office did not have a chance to see how complete the training materials are, or how well they protect taxpayer reports.

Olson discusses those concerns about IRS efforts to administer ACA tax provisions and many other tax administration concerns in a new report on IRS performance. The Taxpayer Advocate Service prepares the reports every year, to tell Congress how the IRS is doing at meeting taxpayers’ needs.

In the same report, Olson talks about other ACA-related problems, such as headaches for ACA exchange plan premium tax credit subsidy users who are also Social Security Disability Insurance program users, and she gives general ACA tax provision administration data.

APTC subsidy

The ACA premium tax credit subsidy program helps low-income and moderate-income exchange plan users pay for their coverage.

Exchange plan buyers who qualify can get the tax credit the ordinary way, by applying for it when they file their income tax returns for the previous year. But about 94 percent of tax credit users receive the subsidy in the form of an “advanced premium tax credit.”

When an exchange plan user gets an APTC subsidy, the IRS sends the subsidy money to the health coverage issuer while the coverage year is still under way, to help cut how much cash the user actually has to pay for coverage.

When an APTC user files a tax return for a coverage year, in the spring after the end of the coverage year, the user is supposed to figure out whether the IRS provided too little or too much APTC help. The IRS is supposed to send cash to consumers who got too little help. If an APTC user got too much help, the IRS can take some or all of the extra help out of the user’s tax refund.

Another ACA provision, the “individual shared responsibility” provision, or individual coverage mandate provision, requires many people to obtain what the government classifies as solid major medical coverage or else pay a penalty.

Individual taxpayers first began filing ACA-related tax forms in early 2015, for the 2014 coverage year. Early last year, individual taxpayers filed ACA-related forms for the second time, for the 2015 coverage year.

Only 6.1 million taxpayers told the IRS they owed individual mandate penalty payments for 2015, down from 7.6 million who owed the penalty for 2014.

But, in part because the ACA designed the mandate penalty to get bigger each year for the first few years, the average penalty payment owed increased to $452 for 2015, from $204 for 2014.

The number of households claiming some kind of exemption from the penalty program increased to 8.6 million, from 8.4 million.

The number of filers who said they had received APTC help increased to 5.3 million for 2015, up from 3.1 million for 2014. And the amount of APTC help reported increased to $18.9 billion for 2015, from $11.3 billion in APTC subsidy help for 2014.

That means the 2015 recipients were averaging about $3,566 in reported subsidy help in 2015, down from $3,645 in reported help for 2014.

Olson says her office helped 10,910 taxpayers with ACA premium tax credit issues in the 12-month period ending Sept. 30, 2016, up from 3,318 in the previous 12-month period.

One of her concerns is how the Social Security Disability Insurance program, which is supposed to serve people with severe disabilities, interacts with the ACA provision that requires people who guess wrong about their income during the coverage year to pay back excess APTC subsidy help.

SSDI lump-sum payment headaches

Some Social Security Disability Insurance recipients have to fight with the Social Security Administration for years to qualify for benefits. Once the SSDI recipients win their fights to get benefits, the SSA may pay them all of the back benefits owed in one big lump sum.

The big, lump-sum disability benefits payments may increase the SSDI recipients’ income for a previous year so much they end up earning too much for that year to qualify for ACA premium tax credit help, Olson says in the new report.

The SSDI recipients may then have to pay all of the ACA premium tax credit help they received back to the IRS, Olson says.

So far, IRS lawyers have not figured out any law they can use to protect the SSDI recipients from having to pay large amounts of premium tax credit help back to the government, Olson says.

For now, she says, her office is just trying to work on a project to warn consumers about how accepting any lump-sum payment, including an SSDI lump-sum benefits payment, might lead to premium tax credit headaches.