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Small Business Employee Benefits and HR Blog

Will the IRS be Ready to Handle ACA Tax Credit Fraud?

IRS ACA Tax Credit FraudUnder health care reform, the government is providing health insurance tax credits to help Americans purchase individual health insurance. The health insurance tax credits are advanced-payable and based on household income (among other eligibility criteria). The IRS is responsible for distributing the tax credits, reconciliation, and assessing tax penalties for not having insurance. While the IRS appears to be ready for processing and handling the new tax credits, a new report by the Treasure Inspector General for Tax Administration (TIGTA) questions whether the IRS is yet able to handle tax credit fraud.

Will the IRS be Ready to Handle ACA Tax Credit Fraud?

According to the TIGTA report:

  • The existing IRS fraud detection system may not be capable of identifying refund fraud or schemes prior to the issuance of tax return refunds. This is in part because the tax credits are paid up-front (pay first, verify second).

  • When audited, the report found the IRS did a good job of accurately calculating the amount of tax credits when auditors ran tests on the system before the health exchanges opened.

  • Taxpayers will have to be careful when they apply for the credits. If taxpayers' incomes increase while they are receiving the credit, and they get a larger credit than they are entitled to, they may have to repay some or all of the credit when they file their federal tax returns. (Although, these amounts are capped - see this article). Likewise, if taxpayers get a smaller credit than they are entitled to, they can get the difference in the form of a tax refund.

  • The report warns that IRS systems may not be capable of detecting schemes by people who fraudulently claim refunds.

According to an article by Politico, " 'The ACA Program has not yet completed a fraud mitigation strategy,' the report said. 'It is important for the IRS to thoroughly consider fraud threats and risks that could impact new ACA systems.' "

In addition to managing tax credit fraud, the IRS is responsible for reconciliation of the tax credits when individuals file annual taxes. Whether individuals use prior year’s income, or more current income when applying for subsidized coverage through the exchanges, it is likely that actual income will be different from what is ultimately reported on their tax return.

The IRS is required to reconcile the tax credit payment against actual annual income when the individual files their tax return. The reconciliation process will verify actual income and determine if there was an over- or under- payment. Any over-payment must be repaid by the individual. An under-payment will result in a refund.

See related articles on the checks and balances of the ACA health insurance tax credits: