Consumers seem to have fewer problems with Affordable Care Act tax rules these days, but consumers who do have ACA tax problems may end up drifting through procedural fog.
Nina Olson, the country’s national taxpayer advocate, talks about what she sees as Internal Revenue Service abuse of “unreal audits,” or audit-like examinations conducted outside of the formal IRS audit framework, in a new annual report she prepared for Congress.
The “distinction between ‘real’ and ‘unreal’ audits has real-world consequences that impact taxpayer rights, including the right to challenge the IRS’s position and be heard, the right to appeal an IRS decision in an independent forum, the right to finality, and the right to a fair and just tax system,” Olson writes in the report.
The IRS strategic plan calls for increased use of unreal audits, Olson writes.
“It is therefore crucial for the IRS to reevaluate and revise its current guidance about what constitutes an audit, through the lens of the Taxpayer Bill of Rights,” Olson argues.
(Related: Life Near the ACA Cut-Off Cliff)
Olson says that one area in which the IRS has made heavy use of unreal audits is in asking taxpayers about conflicts between the information on their Form 8962 premium tax credit filings and information in ACA public exchange programs’ Form 1095-A reports on taxpayers’ use of advance premium tax credit subsidies.
When the IRS looks into the discrepancies, “there are situations where the IRS is essentially conducting a ‘real’ audit under the guise of an ‘unreal’ audit, thereby circumventing statutory protections against repeat examinations,” Olson writes.
Congress created the taxpayer advocate position, and the Office of the Taxpayer Advocate, through a provision in the Taxpayer Bill of Rights 2 bill. Former President Bill Clinton signed that bill into law in 1996.
The taxpayer advocate’s office has hundreds of case advocates helping consumers with IRS problems. The advocate is supposed to give Congress annual reports on what the case advocates are seeing out in the field.
In the new annual report, Olson discusses many topics, including problems with IRS use of private debt collection agencies, reductions in IRS employee training, and cuts in IRS walk-in center assistance.
A copy of the report section that refers to unreal audits, and to ACA-related case advocate activities, is available here.
Here are five ACA and unreal audit highlights, for insurance agents and brokers, from Olson’s report.
(Photo: Allison Bell/TA)
1. The number of ACA-related tax filing problems appears to be falling.
In a table listing the case advocates’ top 10 issues, Olson shows that the number of new cases involving ACA premium tax credit problems fell to 4,643 in federal fiscal year 2017, which ended Sept. 30, 2017, from 10,910 the previous year.
2. Most of the ACA-related tax filing problems that come to the case advocates’ attention involve the ACA premium tax credit.
The number of cases involving the “individual shared responsibility” penalties — penalties that the ACA imposes on many people who lack what the government classifies as adequate health coverage for enough of the year — fell to 367 in fiscal year 2017, from 390 in fiscal year 2016.
The number of cases involving other types of ACA issues fell to 98, from 136.
The case advocates are now learning how to help employers with ACA employer health coverage reporting and penalty issues, Olson says.
3. Unreal audits are much more common than real audits.
IRS reports on formal audits understate how often the IRS contacts taxpayers for compliance reasons, Olson says.
The IRS formally audited just 0.7% of individual tax return filers in fiscal year 2016, but imposed real and unreal audit procedures of all kinds on 6.2% of the individual return filers, according to Olson’s analysis of IRS data.
4. Most unreal audits involve four major types of situations.
Olson says the IRS can use unreal audits in situations that involve:
Apparent math or clerical errors.
Conflicts between the information on an individual’s own tax returns and information in reports filed by other parties, such as employers or banks.
Signs of possible identity theft or refund fraud.
The automated substitute for return (ASFR) program. Under the ASFR program, the IRS uses information from outside parties to estimate the tax liability for some people who have failed to file individual returns and appear to have incurred a significant tax liability.
5. Olson distinguishes between efforts to correct simple errors and efforts to package audits as corrections.
The IRS should be able to use a process other than a formal audit for a situation involves an obvious error, such as an addition error, or a failure to include a necessary form, Olson says.
When, however, the IRS responds to conflicts between information on an individual’s Form 8962 ACA premium tax credit filing and an ACA public exchange Form 1095-A coverage filing, the main difference between a formal audit process and the “automated questionable credit” process is that the IRS states in the notice letter that the process is not an audit, Olson says.
“There are ‘unreal’ audit situations that clearly look like an audit, walk like an audit, quack like an audit, and should be considered a ‘real’ audit,” Olson argues.
—Read 7 Must-Know New ACA Tax Administration Facts on ThinkAdvisor.