Report: Medical device tax missing revenue mark

By Peter Schroeder
08/19/14 03:06 PM EDT - The Hill

A tax imposed on medical devices included in the Affordable Care Act is raising roughly three-quarters of the revenue originally expected, according to a new government report.

The watchdog for the Internal Revenue Service reported Tuesday that the tax collection agency was still facing problems implementing the medical device tax included in the 2010 healthcare reform law.

The Treasury Inspector General for Tax Administration (TIGTA) said the IRS needs to continue to tweak its compliance rules for the tax, identifying several mistakes when it came to collecting money owed the government.

IRS agents were still having a hard time determining exactly which medical device manufacturers were subject to the tax; both the returns filed and revenue raised have come in well short of expectations.

Originally, the IRS estimated it would receive between 9,000 and 15,600 forms to pay the tax, raising $1.2 billion in the second and third quarters of 2013, according to TIGTA. But the IRS only received roughly 5,100 forms, and reaped just $913.4 million.

Republicans were quick to seize on the report as proof that the medical device tax, a key revenue-raiser included in the healthcare reform law that has bipartisan opposition, is flawed and should be scrapped.

“Everything from this ill-conceived tax’s structure to its implementation has been a disaster,” said Sen. Orrin Hatch (R-Utah), the top Republican on the Finance Committee. “As I have said all along — the only real way to fix this tax is to repeal it.”

While 79 senators from both parties agreed to repeal the medical device tax in a nonbinding vote last year, key leaders, including Senate Majority Leader Harry Reid (D-Nev.), have blocked efforts to bring it up.

Some GOP lawmakers are eyeing an end-of-year package of tax “extenders” as another chance to try and repeal the measure.

Part of the problem with collecting on the tax, TIGTA found, was that the IRS was still having trouble ensuring those who owe the tax are paying it correctly. Of those 5,100 forms, the watchdog found 276 errors, resulting in a discrepancy of $117.8 million.

TIGTA found cases where the tax was both overpaid and underpaid.

While electronic returns automatically check to ensure that the tax paid is appropriate for the amount of medical device sales reported by a company, the IRS does not have a similar system in place for paper returns, where the problems were found.

As a result, things like missing or misplaced decimal points, either put there by the taxpayer or the agent processing the return, could lead to tax payments that miss the mark.

TIGTA recommended the IRS hone its compliance tools to more accurately process medical device tax returns, and revisit those forms where errors were found. The IRS agreed with the recommendations. 

This article updated at 4:24pm.