Medical Device Excise Tax Program May Require Surgery to Meet its Goals

The Treasury Inspector General for Tax Administration (TIGTA) has issued a report revealing inadequacies in the Internal Revenue Service’s (IRS) current strategy for ensuring compliance with the medical device excise tax created by the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148). According to the TIGTA press release, the current IRS protocol for processing the Form 720, Quarterly Federal Excise Tax Returns that manufacturers, producers, and importers are obligated to file, is not sufficiently ensuring compliance and reporting of the new ACA tax.

Excise Tax

The ACA, through amendment to the Internal Revenue Code (IRC) (26 U.S.C. 4191), implemented an excise tax of 2.3 percent on the sale of certain medical devices. The tax, set out in regulations at 21 C.F.R 807, was projected to produce $20 billion in revenue for Fiscal Years (FYs) 2013 through 2019. The IRS has issued final regulations and the Department of Treasury has issued notices that are designed to provide guidance and ensure compliance with the new tax.Despite the agency outreach, the TIGTA investigation and report revealed that the number of Forms 720 filed and the amount of revenue reported was lower than had been projected.

Findings

The TIGTA Report identified $117.8 million in medical device excise tax discrepancies between the amount of tax collected by the IRS through the Form 720 process and the amount TIGTA calculated as proper. The TIGTA investigation revealed 219 “failure to deposit” penalties totaling $706,753 that were incorrectly assessed by the IRS. The IRS reversed 133 of those penalties and the remaining 86 were reversed by IRS management after TIGTA identified the errors. A significant fault in the present system that TIGTA identified is the inability of the IRS to determine the medical device manufacturers that are registered with the FDA, which are required to submit a Form 720. Without the ability to identify the tax paying population, TIGTA believes the IRS will be unable to form an effective strategy to ensure businesses are remaining compliant.

Recommendations

TIGTA’s primary recommendation is for the IRS to develop a protocol for identifying non-compliant manufacturers. Another recommendation is for the IRS to review tax returns that resulted in improper payments so the IRS can identify the appropriate amount owed. TIGTA also suggest that the IRS develop a correspondence mechanism so that IRS can obtain information about missing taxable sales and tax amounts.