Not even the IRS can make sense of the medical device tax, a provision of the Affordable Care Act requiring medical device companies to pay a 2.3% levy on all U.S. sales, according to a report from a U.S. Treasury inspector general.
The tax is imposed on all U.S. sales of prescribed medical devices and contains a "retail exemption" on devices sold to the general public, such as contact lenses or diabetes devices and supplies. Estimates on the amount the tax is expected to range vary, from $30 billion over 10 years to the Joint Committee on Taxation’s forecast for $20 billion for fiscal years 2013 through 2019.
The IRS told MassDevice.com last month that it collected $1.4 billion last year in excise tax payments from medical device companies.
But a TIGTA audit released this week found that the IRS "cannot identify the population of medical device manufacturers registered with the Food & Drug Administration" that ought to be making semi-monthly deposits on the tax, meaning that the IRS collected a little more than $913 million during the 1st half of 2013, well shy of the $1.2 billion it expected to collect.*
That’s because not all of the companies registered with the FDA are subject to the tax, according to the TIGTA audit report. As of May 21, 2013, there were 16,370 businesses registered with the FDA as medical device makers, but the July 17 audit estimated that only 4,500 to 7,800 of those may be subject to the excise tax.
"The IRS concluded that a more precise estimate of businesses selling taxable devices could not be made because the FDA’s requirements for registering are much different than requirements for paying the excise tax," according to the report.
Add to that the problem that the IRS can’t ensure the accuracy of medical device companies’ filings, according to the report. The audit revealed discrepancies in 276 of 5,107 medical device tax filings, or about 5.4%, worth some $117.8 million.
And despite a "penalty relief period" setting up a moratorium on fines for failing to make device tax payments, the IRS dealt $706,753 in failure to deposit penalties for 219 infractions during the 1st half of 2013, according to the report. Although the agency reversed 133 of those penalties, the remaining 86 went unaddressed until TIGTA alerted the IRS.
"TIGTA recommended that the IRS continue refining its compliance strategy to include actions that can be taken to identify noncompliant manufacturers. TIGTA also recommended that the IRS conduct a review of the 276 tax returns TIGTA identified to determine the proper excise tax owed, establish a process to verify the accuracy of the medical device excise tax amount for [medical device tax filings], and initiate a process to correspond with taxpayers to obtain missing taxable sales or tax amounts," according to the report. "The IRS agreed with our recommendations and plans to consider alternative strategies for identifying noncompliant manufacturers, identify programming changes needed to improve the math verification for [the filings], and implement procedures for corresponding with taxpayers if the changes can be accomplished within budgetary constraints. The IRS also indicated that about ⅔ of the paper-filed tax returns TIGTA identified were reviewed."