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Audit: PPACA tax credits vulnerable to fraud

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WASHINGTON (AP) — The new Patient Protection and Affordable Care Act (PPACA) tax credit subsidy program may be vulnerable to fraud, a Treasury Department watchdog said Tuesday in a new audit report.

The Internal Revenue Service, an arm of the Treasury Department, is administering the tax credit program, which is supposed to reduce the amounts middle-income consumers pay for health coverage.

“The IRS’ existing fraud detection system may not be capable of identifying [PPACA] refund fraud or schemes prior to the issuance of tax return refunds,” J. Russell George, the Treasury inspector general for tax administration, said of the audit report.

“The IRS reported that the long-term limitations of its existing fraud detection system include its inability to keep pace with increasing levels of fraud and to serve the organization’s evolving compliance needs,” inspector general’s office officials said in the report.

Sounding more upbeat, Acting IRS Commissioner Danny Werfel said, “The IRS has a strong, effective system in place for administering the Premium Tax Credit. We have a proven track record of safely and securely transmitting federal tax information and we have a robust and secure process in place to deliver this important credit for taxpayers.”

The IRS is expected to pay most of the credits to health insurers in 2014, to reduce the amounts taxpayers pay for health coverage. Some taxpayers may pay the full cost of premiums themselves, then claim the credits on their federal tax returns. The taxpayers will start claiming the credits on their 2014 returns, which will be due in April 2015.

Congress tied PPACA tax credit amounts to income.

A low-income family of four making $35,325, or one and one-half times the poverty level, would pay no more than 4 percent of its income for a PPACA exchange policy, or about $1,400 a year. The rest of the policy would be covered by the tax credit, which would be paid directly to insurers by the government.

A similar-sized family making $70,650 would be expected to pay up to 9.5 percent of its income for a policy, or about $6,700 annually.

The IRS is in charge of verifying an applicant’s eligibility for the tax credit and calculating the amount.

Taxpayers, however, 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.

On the other hand, if taxpayers get a smaller credit than they are entitled to, they can get the difference in the form of a tax refund.

Inspector general’s office officials said in the audit report that the IRS did a good job of accurately calculating the amount of tax credits when auditors ran tests on the system before the exchange enrollment season started Oct. 1. But officials warned that IRS systems may not be capable of detecting tax credit refund fraud schemes.

IRS officials said they’ll have an easier time detecting fraud when a Return Review Program system and a PPACA Validation Service System are completed.

Associated Press writer Ricardo Alonso-Zaldivar contributed to this report.

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