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IRS Bungles Collection of Obamacare's 2.3 Percent Medical Device Tax


The IRS "faces challenges to definitively identify manufacturers subject to the medical device excise tax reporting and payment requirements."

MIAMI, FL - JULY 31: Internal Revenue Service Commissioner John Koskinen speaks to the media during a visit to the Miami office at the Claude Pepper Federal Building on July 31, 2014 in Miami, Florida. Mr. Koskinen is touring several IRS offices since he became head of the nation's tax agency. Joe Raedle/Getty Images

A Treasury Department watchdog reported Tuesday that the Internal Revenue Service is having significant trouble collecting the 2.3 percent excise tax on manufacturers, producers and importers of medical devices, a controversial tax that was imposed under Obamacare.

The Treasury Inspector General for Tax Administration released a report that said the IRS needs to take several steps to fix various problems. These problems include identifying which companies to tax, eliminating tax collection discrepancies, and ensuring that tax penalties are not imposed incorrectly against companies.

A new report says the IRS, run by Commissioner John Koskinen, is having all kinds of problems collecting Obamacare's 2.3 percent medical device tax. Joe Raedle/Getty Images

The medical device tax was seen as a severe blow to the medical device industry, as the 2.3 percent tax is on sales of devices, not a company's bottom-line profit. Republican opponents of the tax say it runs the risk of moving innovative device companies out of the country entirely.

According to TIGTA's report, the IRS has having significant problems identifying which companies must pay the tax. The report said the law envisioned that the IRS would use a list of companies registered with the Food and Drug Administration to determine which companies to tax.

But it said the FDA list is much broader, and that the IRS believes only 4,500 to 7,800 of the more than 16,000 companies on that list will ultimately need to pay the tax.

"While the IRS has taken steps to educate medical device manufacturers of the medical device excise tax during implementation, it faces challenges to definitively identify manufacturers subject to the medical device excise tax reporting and payment requirements,” said TIGTA's J. Russell George.

That problem could be related to another problem, which is a lower amount of taxes collected in the first six months of 2013. The report said the IRS estimated that it would receive anywhere from 9,000 to 15,600 tax forms, and about $1.2 billion in tax receipts.

But TIGTA said that only 5,107 forms had been filed in the first half of 2013, and just over $900 million has been collected.

TIGTA said a related issue is that dozens of companies appear to be either over- or under-paying the necessary tax.

The IRS also appears to have assessed penalties against 219 companies for not paying the excise tax in the last half of 2013. But TIGTA noted that the Obama administration had agreed to waive those penalties.

Penalties totaled more than $700,000, and as of early 2014, the IRS had reversed 133 of those penalties. But TIGTA's audit revealed that the IRS did not reverse the other 86 penalties, and did so only after TIGTA informed the IRS of this problem.

The IRS agreed with TIGTA's recommendations to fix these problems, but it is unclear how soon corrective steps can be taken.

On the problem related to identifying which companies will be subject to the tax, TIGTA said only that the IRS must continue to refine its plan to identify noncompliant manufacturers.

The IRS agreed, and said it is "considering alternative strategies for identifying noncompliant medical device manufacturers and may issue notices to potential non filers if there appears to be a benefit to future tax administration."

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