Affordable Care Act:
Controls Over Financial Accounting for the
Premium Tax Credit Should be Improved
Final Report issued on March 2, 2016
Highlights of Reference Number: 2016-13-021 to the Internal Revenue Service Chief Financial Officer.
IMPACT ON TAXPAYERS
The Patient Protection and Affordable Care Act created a refundable tax credit referred to as the Premium Tax Credit (PTC) to assist eligible individuals with the cost of their health insurance premiums. Rather than wait to claim the credit on their Federal tax returns, individuals may elect to have the PTC paid directly to their health insurance issuers as partial payment for their monthly premiums (referred to as the Advance Premium Tax Credit or APTC). In addition, as a refundable credit, the PTC is fully payable to the taxpayer even if the tax credit exceeds the tax liability.
WHY TIGTA DID THE AUDIT
This audit was initiated as the result of a congressional request for a review of the administration of the PTC. This review was performed as part of a series of coordinated audits and evaluations by the Department of Health and Human Services Office of Inspector General and TIGTA. The objective of this review was to evaluate IRS financial accounting controls for the PTC.
WHAT TIGTA FOUND
TIGTA identified that controls over the financial accounting for fund outlays (disbursements) associated with the PTC should be improved. Specifically, TIGTA found errors in the IRS financial accounting and reporting of PTC-related fund outlays. To reconcile the PTC, the IRS must adjust the amounts initially recorded for APTC payments based on taxpayer‑estimated income and family size to the actual PTC amount based on income and number of dependent deductions reported on the taxpayer’s Federal tax return. The errors we identified were due to a programming miscalculation. The miscalculation was not caught due to insufficient testing of the financial system programming developed to account for the impact of the reconciliation of PTC fund outlays (disbursements).
Due to this programing error, the IRS understated the amount of PTC disbursements and overstated the balance in the IRS PTC account by $447 million. Further, the error TIGTA identified in the financial accounting records, if left uncorrected, would have resulted in a misstatement of the Fiscal Year 2015 IRS financial statements refundable credits in excess of tax liability account.
In addition, TIGTA determined that the key controls established over PTC accounting do not include the requirement for the periodic performance of a financial reconciliation of the IRS’s records and the APTC payment information (by taxpayer) prepared and reported by the Health Insurance Marketplaces.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the Chief Financial Officer, in coordination with the Chief Technology Officer, develop procedures requiring the timely and comprehensive review and testing of any changes to the financial system programming used to report outlays related to the PTC. In addition, the Chief Financial Officer, in coordination with the Affordable Care Act Office, should work with the Centers for Medicare and Medicaid Services to jointly develop procedures for the periodic financial reconciliation of APTC information.
In their response, IRS management agreed with our recommendations. The IRS plans to ensure that established test standards and guidelines are adhered to during financial systems testing. In addition, the IRS plans to perform periodic reconciliations of APTC payment information provided by the Health Insurance Marketplaces to its financial records.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number / 202-622-6500
E-mail Address / TIGTACommunications@tigta.treas.gov
Website / https://www.treasury.gov/tigta