IRS Needs Changes to Avoid Health Law Fraud, Audit Says

IRS Building
The Internal Revenue Service, which already collects income data for tax purposes, is responsible for sending the subsidies directly to health insurers during 2014. Photographer: Andrew Harrer/Bloomberg

The U.S. Internal Revenue Service needs to make changes to prevent fraud and improve security in systems it is building to deliver health insurance subsidies, according to an audit by the tax agency’s inspector general.

The audit, released today by the Treasury Inspector General for Tax Administration, finds that the IRS successfully completed development and testing for the systems that compute the subsidies under the Affordable Care Act. The audit found that “critical” pieces in security controls failed during testing and anti-fraud programs are still being developed.

“The IRS’s existing fraud detection system may not be capable of identifying ACA refund fraud or schemes prior to the issuance of tax return refunds,” the auditors wrote.

In the IRS’s response, Chief Technology Officer Terence Milholland said the agency has improved security since the auditors completed their review and that work continues on combating tax refund fraud.

“The IRS has a strong, effective system in place for administering the premium tax credit,” Danny Werfel, the acting IRS commissioner, said in a statement. “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.”

Technology Flaws

The health law’s debut has been plagued by technology flaws, largely in the insurance marketplace operated by the Department of Health and Human Services. The IRS’s role has received less public attention in recent months, though it is critical to making the law function properly.

The 2010 Patient Protection and Affordable Care Act authorizes subsidies on a sliding scale tied to income with the smallest amounts available for people at four times the poverty level, or $94,200 for a family of four.

Consumers typically qualify for the subsidies for 2014 based on their incomes in 2012, the most recent complete year available.

The IRS and Treasury Department, which already collect income data for tax purposes, are responsible for sending the subsidies directly to health insurers during 2014.

Then, when taxpayers file their income tax returns in early 2015, the subsidies will be reconciled to actual 2014 income. In some cases where income exceeds the projections, taxpayers will have to pay back the government. In cases where income dropped, taxpayers will receive additional subsidies delivered through their tax return.

‘Fraudster’s Dream’

That process requires the IRS to have accurate, up-to-date information about taxpayers’ incomes, family size and insurance coverage.

That system of payment followed by reconciliation is a “fraudster’s dream come true,” said Orrin Hatch of Utah, the top Republican on the Senate Finance Committee.

“While the IRS needs to do more to ensure more safeguards are put in place, the fact is that the problems with these tax credits are deeply rooted in the law itself,” he said in a statement. “I fear the IRS will never be fully capable of ensuring that these refundable tax credits got to those who are truly eligible.”

According to the Congressional Budget Office, the U.S. government will spend $51 billion in fiscal 2015 and $1.1 trillion over the next decade on subsidies and other spending related to the health law.

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