TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Affordable Care Act: The Tax Exempt and Government Entities Divisionís Planning Efforts for the Health Care Reform Legislation

 

 

 

August 16, 2011

 

Reference Number: 2011-10-085

 

 

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.

 

Phone Number ††|202-622-6500

Email Address ††|TIGTACommunications@tigta.treas.gov

Web Site†††††† |http://www.tigta.gov

 

 

HIGHLIGHTS

 

AFFORDABLE CARE ACT: THE TAX EXEMPT AND GOVERNMENT ENTITIES DIVISIONíS PLANNING EFFORTS FOR THE HEALTH CARE REFORM LEGISLATION

 

Highlights

Final Report issued on August 16, 2011

Highlights of Reference Number:2011-10-085 to the Acting Commissioner, Tax Exempt and Government Entities Division.

IMPACT ON TAXPAYERS

The Patient Protection and Affordable Care Act (ACA), along with amendments in the Health Care and Education Reconciliation Act of 2010, contains significant changes to the Nationís health care system.The Tax Exempt and Government Entities (TE/GE) Division has completed most of its initial planning activities for the ACA and is working on implementation activities.Our review did not identify any concerns relating to the methodology the TE/GE Division used to monitor and coordinate its planning efforts.Effective planning is critical to ensuring the TE/GE Divisionís readiness to implement this legislation.

WHY TIGTA DID THE AUDIT

This audit was initiated to determine how the TE/GE Division is planning for the health care reform legislation.The review is included in our Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge of Implementing Health Care and Other Tax Law Changes.

WHAT TIGTA FOUND

The TE/GE Division established an internal Executive Steering Committee (ESC) and five implementation teams to oversee the planning for the ACA.Team meetings involving both the internal ESC and the five implementation teams were held on a monthly basis to discuss progress, issues identified, and actions planned.Significant action items and progress were also documented in a consolidated monthly status report.

The TE/GE Division has completed most of its initial planning activities and is working on implementation activities for the ACA provisions that went into effect in Tax Year 2010.In its planning for the ACA, the TE/GE Division identified nine separate provisions that could impact its customers.In order to address these provisions, the TE/GE Division prepared 17 requests to revise tax forms and/or capture additional data.TIGTA did not identify any concerns relating to the TE/GE Divisionís identification of the ACA provisions applicable to its customers or the methodology used to monitor and coordinate its planning efforts.

Two of the nine provisions, the Small Employer Health Care Tax Credit and the additional requirements for tax-exempt hospitals, required the TE/GE Division to plan new processes for Tax Year 2010.To implement the Small Employer Health Care Tax Credit, the TE/GE Division coordinated the development of an IRS-wide strategy to address taxpayer compliance with requirements of the credit and planned for and initiated a program of compliance examinations of selected tax-exempt returns claiming the credit. As of May 21, 2011, TE/GE Division compliance personnel had initiated compliance reviews on 272 tax returns from tax-exempt organizations claiming this credit.

As required by the ACA, the TE/GE Division also planned and initiated a program of reviews of tax-exempt hospitals and began gathering information for the required annual report.As of April 30, 2011, the TE/GE Division had completed 570 (34 percent) of the 1,700 tax-exempt hospital reviews expected to be completed by the end of Calendar Year 2011.

WHAT TIGTA RECOMMENDED

TIGTA made no recommendations in the report. TE/GE Division management reviewed the report before it was issued and offered clarifying comments and suggestions, which have been taken into account.

 

August 16, 2011

 

 

MEMORANDUM FOR ACTING COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

 

FROM:††††††††††††††††††††††††††† Michael R. Phillips /s/ Michael R. Phillips

Deputy Inspector General for Audit

 

SUBJECT:††††††††††††††††††† Final Audit Report Ė Affordable Care Act: The Tax Exempt and Government Entities Divisionís Planning Efforts for the Health Care Reform Legislation (Audit # 201110020)

 

This report presents the results of our review of the Tax Exempt and Government Entities (TE/GE) Divisionís planning efforts for the health care reform legislation.The overall objective of this review was to determine how the TE/GE Division is planning for the health care reform legislation. This review had a limited scope and focused on the status of the TE/GE Divisionís efforts to plan for implementation of the provisions of the health care reform legislation applicable to its customers.We specifically focused on planning for the Small Employer Health Care Tax Credit and for the additional requirements for tax-exempt hospitals.This audit is included in our Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge of Implementing Health Care and Other Tax Law Changes.

The Treasury Inspector General for Tax Administration made no recommendations as a result of the work performed during this review. TE/GE Division management reviewed the report before it was issued and offered clarifying comments and suggestions, which have been taken into account.

Copies of this report are also being sent to the Internal Revenue Service managers affected by the report results.Please contact me at (202) 622-6510 if you have questions or
Nancy A. Nakamura, Assistant Inspector General for Audit (Management Services and Exempt Organizations), at (202) 622-8500.

 

 

Table of Contents

 

Background

Results of Review

Summary of Actions Taken to Plan for the Implementation of Selected Provisions of the Affordable Care Act

Appendices

Appendix I Ė Detailed Objective, Scope, and Methodology

Appendix II Ė Major Contributors to This Report

Appendix III Ė Report Distribution List

Appendix IV Ė Affordable Care Act Provisions That Could Impact Tax Exempt and Government Entities Division Taxpayers

 

 

Abbreviations

 

ACA

Patient Protection and Affordable Care Act

ESC

Executive Steering Committee

IRS

Internal Revenue Service

TE/GE

Tax Exempt and Government Entities Division

 

Background

 

The Patient Protection and Affordable Care Act, along with amendments in the Health Care and Education Reconciliation Act of 2010, contains significant changes to the Nationís health care system.

The Patient Protection and Affordable Care Act (ACA),[1]along with amendments in the Health Care and Education Reconciliation Act of 2010,[2] contains significant changes to the Nationís health care system.Administration of the changes falls upon the Department of Health and Human Services regarding health care policy issues and to the Internal Revenue Service (IRS) regarding multiple tax law changes included in the legislation. The ACA contains $438 billion worth of revenue provisions in the form of new taxes and fees. The IRSís responsibilities include, but are not limited to:

While several tax provisions took effect in Tax Year[3] 2010, such as the Small Employer Health Care Tax Credit, most will be implemented during the next several years. To manage implementation of the ACA, the IRS established an overall Executive Steering Committee (ESC) in mid-2010 headed by an executive dedicated solely to overseeing the IRSís ACA planning and implementation activities.

The IRS Tax Exempt and Government Entities (TE/GE) Division is responsible for meeting the special needs of pension plans, tax-exempt organizations, and government entities in complying with the tax laws. The ACA impacts the activities of the TE/GE Division in a number of areas.For example, the legislation contains provisions that impact TE/GE Division customers that are employers.Specifically, eligible tax-exempt organizations will be able to claim a credit of up to 25 percent of premiums paid for employeesí health insurance for Tax Years 2010 through 2013.In addition, the legislation adds new requirements to the Internal Revenue Code that tax-exempt hospitals must meet to maintain their tax-exempt status.

This review was performed at the IRS National Headquarters in Washington, D.C., in the office of the TE/GE Division during the period March through June 2011.This review had a limited scope and focused on the status of the TE/GE Divisionís efforts to plan for the implementation of selected provisions of the health care reform legislation applicable to its customers.As such, we relied primarily on interviews with IRS personnel and reviews of available documentation, such as status reports and work requests, and did not perform any detailed testing to evaluate the effectiveness of actions taken by the IRS to implement the health care reform legislation. Otherwise, we conducted this performance audit in accordance with generally accepted government auditing standards.Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective.Detailed information on our audit objective, scope, and methodology is presented in Appendix I.Major contributors to the report are listed in Appendix II.

 

 

Results of Review

 

Preparing for implementation of the ACA tax provisions presented a number of critical challenges to the TE/GE Division, including the need to quickly identify the provisions applicable to its customers and develop a structure to manage planning for the implementation of those provisions. In order to address these challenges, the TE/GE Division established an internal ESC and five implementation teams to oversee planning for the ACA.Team meetings involving both the internal ESC and the five implementation teams were held on a monthly basis to discuss progress, issues identified, and actions planned.Significant progress and action items were documented in a consolidated monthly status report which was used by the internal ESC to monitor progress.In addition, the TE/GE Division provided monthly updates to the IRS-wide ACA ESC.

We did not identify any concerns relating to the TE/GE Divisionís identification of the ACA provisions applicable to its customers or the methodology it used to monitor and coordinate its planning efforts.At the time of our review, the TE/GE Division had completed most of its initial planning activities and was working on implementing the ACA provisions that went into effect in Tax Year 2010.In its planning for the ACA, the TE/GE Division identified nine separate provisions that could impact its customers.[4]To address these provisions, the TE/GE Division prepared 17 requests to revise tax forms and/or capture additional data.Two of the nine provisions, the Small Employer Health Care Tax Credit and the additional requirements for tax-exempt hospitals, also required planning for additional compliance and review processes by the TE/GE Division.We specifically focused our audit work on these two provisions because they required the TE/GE Division to plan new processes for Tax Year 2010.

For implementation of the Small Employer Health Care Tax Credit, the TE/GE Division coordinated on the development of an IRS-wide strategy to address taxpayer compliance with the requirements of the credit and planned for and implemented a program of compliance examinations of selected tax-exempt returns claiming this credit.As required by the ACA, the TE/GE Division also planned for and initiated a program of reviews of tax-exempt hospitals and began gathering information for the annual report.Our limited scope review did not identify any concerns regarding the TE/GE Divisionís planning activities for the ACA provisions and we are making no recommendations in this report.

Summary of Actions Taken to Plan for the Implementation of Selected Provisions of the Affordable Care Act

Small Employer Health Care Tax Credit

The Small Employer Health Care Tax Credit became effective for Tax Year 2010. The credit was designed to encourage small employers, including tax-exempt organizations, to offer health insurance coverage for the first time or maintain coverage they already have. For Tax Years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers or 25 percent of premiums paid by eligible employers that are tax-exempt organizations.The credit for tax-exempt organizations is refundable.The IRS revised the Exempt Organization Business Income Tax Return (Form 990-T) and made programming changes to support processing of the credit for tax-exempt organizations. The IRS also created the Credit for Small Employer Health Insurance Premiums (Form 8941) and instructions to allow small employers, including tax-exempt organizations, to calculate the credit.

The IRS also developed an IRS-wide small employer tax compliance strategy to reduce opportunities for evasion, improve reporting compliance, and enhance taxpayer service.As a part of this strategy, TE/GE Division compliance staff is responsible for performing compliance examinations on selected returns from tax-exempt organizations claiming the Small Employer Health Care Tax Credit.On February 1, 2011, the TE/GE Division provided training to the staff assigned to these compliance examinations.Topics covered in the training included a general introduction to the credit, understanding the forms used to claim the credit, and allowable premium costs.The IRS advised that, as of May 21, 2011, TE/GE Division compliance personnel had initiated compliance examinations on 272 returns from tax-exempt organizations claiming the Small Employer Health Care Tax Credit.Because of the limited scope nature of this review, we did not perform any testing to evaluate the effectiveness of this process.The IRS also advised that through June 14, 2011, 3,980 taxpayers filing Form 990-T claimed the Small Employer Health Care Tax Credit, totaling $16.6 million.

Additional requirements for tax-exempt hospitals

The ACA established additional requirements tax-exempt hospitals must meet in order to maintain their tax-exempt status.These requirements include implementing a financial assistance policy, limiting charges for emergency care, complying with new billing and collection requirements, and conducting community health needs assessments.These requirements affect approximately 5,100 tax-exempt hospitals. The IRS revised the Return of Organization Exempt From Income Tax (Form 990) Schedule H (Hospitals) for Tax Year 2010 in response to the new requirements.The revised Form 990 Schedule H provides a section for tax-exempt hospitals to describe their policies and activities in accordance with the new requirements, including new questions addressing the financial assistance, emergency medical care, and billing and collection policies of tax-exempt hospitals.

In addition to new requirements for tax-exempt hospitals, the ACA requires the IRS to review the community benefit activities[5] of tax-exempt hospitals at least once every 3 years. The TE/GE Division created a new group, the ACA Review of Operations, and provided training on November 16, 2010, to 10 employees responsible for performing the new reviews. Topics covered in the training included overall tax exemption requirements, community benefit standard factors, and unrelated business income issues.

The TE/GE Division advised that as of April 30, 2011, they had completed 570 (34 percent) of the 1,700 tax-exempt hospital reviews expected to be completed by the end of Calendar Year 2011. The ACA Review of Operations group performs these reviews to determine whether the tax-exempt hospitals report their community benefit activities. Because of the limited scope nature of this review, we did not perform any testing to evaluate the effectiveness of this process.

The ACA also requires an annual report to Congress on the levels of charity care[6] provided by private tax-exempt, taxable, and government-owned hospitals and the costs incurred for community benefit activities by private tax-exempt hospitals. This report is to be prepared in consultation with the Department of Health and Human Services. The TE/GE Division identified and started capturing data on the financial assistance policies and community health benefits of tax-exempt hospitals as outlined on the revised Form 990 Schedule H. For example, the IRS made computer programming changes to record data on the financial assistance and other community benefit activities reported on Form 990 Schedule H. The IRS is exploring the need for a memorandum of understanding with the Department of Health and Human Services to help clarify data responsibilities regarding the preparation of this report.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

Our overall objective was to determine how the TE/GE Division is planning for the health care reform legislation.This was a limited scope review and the overall approach was to gather the information necessary to quickly report the status of the TE/GE Divisionís efforts to implement the provisions of the health care reform legislation applicable to its customers. We specifically focused on planning for the implementation of the Small Employer Health Care Tax Credit and the additional requirements for tax-exempt hospitals because these provisions required the TE/GE Division to plan new processes for Tax Year 2010.To accomplish our objective, we:

       I.            Determined whether the TE/GE Division identified the health care legislation provisions that could impact its customers.

    II.            Determined the status of the TE/GE Divisionís efforts to prepare for the health care legislation.

A.    Interviewed TE/GE Division senior managers regarding the overall actions planned/taken to prepare for the health care legislation.

B.     Reviewed meeting minutes of any steering committees/implementation teams established within the TE/GE Division to guide planning for the health care legislation.

C.     Interviewed applicable TE/GE Division personnel to obtain more detailed information on actions planned/taken for the health care provisions.

III.            Determined any plans by TE/GE Division management to develop new processes or programs or expand existing staffing to address implementation of the health care legislation.

A.    Interviewed TE/GE Division management to determine any actions taken/planned to implement new processes or programs to prepare for the health care legislation.

B.     Determined any plans to hire new staff or assign additional responsibilities to existing TE/GE Division personnel to prepare for the health care legislation.

Internal controls methodology

Internal controls relate to managementís plans, methods, and procedures used to meet their mission, goals, and objectives.Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations.They include the systems for measuring, reporting, and monitoring program performance.We determined the following internal controls were relevant to our audit objective:the TE/GE Divisionís policies and procedures related to planning for the implementation of the health care legislation. We evaluated these controls by interviewing management, reviewing implementation team meeting minutes and status reports, and analyzing implementation plans.

Appendix II

 

Major Contributors to This Report

 

Nancy A. Nakamura, Assistant Inspector General for Audit (Management Services and Exempt Organizations)

Jeffrey M. Jones, Director

Anthony J. Choma, Audit Manager

Angela Garner, Lead Auditor

Mary F. Herberger, Senior Auditor

Rashme Sawhney, Auditor

 

Appendix III

 

Report Distribution List

 

CommissionerC

Office of the Commissioner Ė Attn: Chief of StaffC

Deputy Commissioner for Services and EnforcementSE

Acting Deputy Commissioner, Tax Exempt and Government Entities Division SE:T

Director, Exempt Organizations, Tax Exempt and Government Entities DivisionSE:T:EO

Director, Government Entities, Tax Exempt and Government Entities DivisionSE:T:GE

Chief Counsel CC

National Taxpayer AdvocateTA

Director, Office of Legislative AffairsCL:LA

Director, Office of Program Evaluation and Risk Analysis RAS:O

Office of Internal Control OS:CFO:CPIC:IC

Audit Liaison:Director, Communications and Liaison, Tax Exempt and Government Entities Division SE:T:CL

 

 

Appendix IV

 

Affordable Care Act Provisions That Could Impact Tax Exempt and Government Entities Division Taxpayers

 

This appendix presents information on ACA tax provisions that could impact TE/GE Division taxpayers.

 

Affordable Care Act Section

Affordable Care Act Provision

Provision Description

Effective Date

1

1322

Qualified Nonprofit Health Insurance Issuers

 

Provides tax-exempt status under section 501(c) (29) for qualified nonprofit health insurance issuers that meet certain requirements of the Consumer Operated and Oriented Plan program established by the Department of Health and Human Services.

3/23/2010

2

1341

Transitional Reinsurance Program

Provides tax exemption for applicable reinsurance entities.

3/23/2010

3

1421

Small Employer Health Care Tax Credit

Provides a refundable tax credit to small
tax-exempt employers who contribute to health insurance premiums for their employees.

1/1/2010

4

5605

Key National Indicator System

Provides tax exemption for organizations that partner with the National Academy of Sciences to implement a Key National Indicator System.

3/23/2010

5

6301


Patient-Centered Outcomes Research

Added the Patient-Centered Outcomes Research Institute to the list of tax-exempt organizations.

3/23/2010

Affordable Care Act Section

Affordable Care Act Provision

Provision Description

Effective Date

6

9007

Additional Requirements for Tax-Exempt Hospitals

Imposes new requirements for tax-exempt hospitals to maintain their tax-exempt status.Also,
tax-exempt hospitals are required to adopt a financial assistance and emergency medical care policy, billing and collection policies, and conduct community health needs assessments at least once every 3 years. Requires the IRS to perform a review of the community benefit activities at least once every 3 years for tax-exempt hospitals.

3/23/2010

Community assessment

Beginning after 3/23/2012

7

9021

Exclusion of Health Benefits Provided by Indian Tribal Governments

Excludes from gross income the value of specified Indian tribal health benefits.

3/23/2010

8

9023

Qualifying Therapeutic Discovery Credit

Provides a 50 percent investment tax credit for qualified therapeutic discovery projects.

1/1/2009

9

10907

Excise Tax on Tanning Services

Imposes a 10 percent tax on indoor tanning services.

7/1/2010

Source: Legislative Analysis Tracking and Implementation Services reports and IRS internal documents.



[1] Pub. L. No. 111-148, 124 Stat. 119 (2010).

[2] Pub. L. No. 111-152, 124 Stat. 1029.

[3] Tax year refers to a 12-month accounting period for keeping records on income and expenses used as the basis for calculating the annual taxes due.For most individual taxpayers, the tax year is synonymous with the calendar year.

[4] See Appendix IV for a listing of the provisions that could impact TE/GE Division customers.

[5] Community benefit activities are tax-exempt hospital programs and services that promote the health of the community or communities served by the organizations.

[6] Charity care refers to the provision of financial assistance at tax-exempt hospitals and other facilities, including providing free or discounted health services to persons who meet the tax-exempt hospitalís criteria for financial assistance and are thereby deemed unable to pay for all or a portion of the services.