Claims for Small Business Health Care Tax Credit Much Lower than Expected

The number of claims for the Small Business Health Care Tax Credit, which was included in the health care reform law as a way to help small businesses provide health insurance for their employees, has been much lower than anticipated, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, found that the volume of claims for the credit has been low despite IRS efforts to inform 4.4 million taxpayers who could potentially qualify. According to the IRS, as of mid-May 2011, just over 228,000 taxpayers had claimed the credit, totaling more than $278 million in claims. The Congressional Budget Office had originally estimated that taxpayers would claim up to $2 billion worth of Small Business Health Care Tax Credits for tax year 2010 and the cost would be $37 billion over 10 years.

The IRS plans to conduct focus groups to determine why the claim rate was so low. However, the TIGTA report indicates what some of the problems have been. TIGTA found that some taxpayers and tax practitioners made mistakes when completing Form 8941 to apply for the credit. That form, Credit for Small Employer Health Insurance Premiums (Form 8941), also does not contain all of the data and calculations needed to verify each step of credit eligibility.

“The Small Business Health Care Tax Credit is an important credit for both small business employers and their employees,” said TIGTA Inspector General J. Russell George in a statement. “TIGTA’s recommendations, once adopted, should improve the IRS’s ability to verify claims for this credit.”

While the IRS sent postcards to businesses that might potentially qualify for the credit to make sure they were aware of it, the IRS did not have ready access to data that would allow it to determine which of these businesses actually offered health insurance to their employees or otherwise qualified for the credit. Many small businesses do not offer health insurance and would not qualify for the credit. Other factors, such as family members working as employees or the business failing to offer the right kind of health care plan, might also cause businesses to be ineligible.

The IRS said it was working to expand awareness of the tax credit. "The IRS appreciates TIGTA’s acknowledgement of all the efforts we have already taken to implement and educate employers about the Small Business Health Care Tax Credit," the IRS said in a statement forwarded by a spokesperson. "This credit is a valuable incentive for qualifying employers who provide coverage to their workers, and was immediately in effect upon enactment of the Affordable Care Act in 2010.  The total value of credits claimed—already 56 percent higher than the early figures cited in this report—will continue to grow as the IRS finishes processing returns that were filed close to the extension deadlines.  Given the mid-year implementation of this new credit, some employers may not have been able to take full advantage of the credit in 2010 because health coverage choices for the year had already been made. The IRS continues to educate and inform small employers about this valuable credit so that they can fully factor this credit into their health coverage choices."

TIGTA noted in its report that the IRS spoke with industry groups and professional organizations to try to determine why businesses were not claiming the tax credit. Some reasons given were that small businesses might be taking a wait-and-see approach with the credit. Others said the credit was not worth the time and effort to claim it. Taxpayers were also unclear about the specifics of the credit and relied on tax professionals to claim it, In some cases, the business-related information needed to claim the credit was not readily available.  The late start to the filing season may also have affected the number of claims to date.

The IRS plans to conduct focus groups with tax practitioners to identify knowledge gaps on the part of taxpayers and tax practitioners, determine barriers to taxpayers claiming the credit, and determine better ways to communicate with them.

When TIGTA examined a sampling of returns claiming the credit, it found errors in calculating the number of full-time equivalent employees, incorrect application of the percentage allowance, incorrect calculations of phase-out rules, and claims that exceeded the maximum allowed based on the state average.

TIGTA made several recommendations to make it easier for the IRS to verify eligibility and to correctly process claims for the credit. Among the recommendations was that the IRS track Professional Employer Organization relationships and seek legislation to provide targeted math error authority. The credit is specifically targeted to small employers, but certain taxpayers may claim the credit even when they have not filed employment tax returns. This occurs because companies can enter into a contractual relationship with a Professional Employer Organization that manages human resources on their behalf.

IRS officials agreed with the recommendations and stated that they plan to take appropriate corrective actions.