Affordable Care Act: The Tax Exempt and Government Entities Division’s 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 DIVISION’S 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 Nation’s 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 Division’s 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 Division’s 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 – Affordable Care Act: The Tax Exempt and Government Entities Division’s 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) Division’s 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 Division’s 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.
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Abbreviations
|
ACA |
Patient Protection and Affordable Care
Act |
|
ESC |
Executive Steering Committee |
|
IRS |
Internal Revenue Service |
|
TE/GE |
Tax Exempt and Government Entities
Division |
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 Nation’s 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 Nation’s 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 IRS’s 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 IRS’s 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 employees’ 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 Division’s 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.
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
Division’s 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 Division’s 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 Division’s 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 Division’s 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 management’s 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 Division’s 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
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Acting Deputy Commissioner, Tax Exempt and
Government Entities Division SE:T
Director, Exempt Organizations,
Tax Exempt and Government Entities Division SE:T:EO
Director, Government Entities,
Tax Exempt and Government Entities Division SE:T:GE
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL: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 |
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 |
|
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, |
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 hospital’s criteria for financial assistance and are thereby deemed unable to pay for all or a portion of the services.