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Device tax audit calls for ‘improved strategy’

August 20, 2014

By Craig Palmer

Washington – An improved strategy is needed to ensure accurate reporting and payment of the medical device excise tax, the Treasury Inspector General for Tax Administration said in an audit of IRS implementation of the Affordable Care Act tax.

“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 paper-filed Forms 720 and implement procedures for corresponding with taxpayers if the changes can be accomplished within budgetary constraints,” the report said.

“Our review found that both the number of Forms 720 filed reporting the medical device excise tax and the amount of the associated revenue reported are lower than estimated. The IRS is attempting to develop a compliance strategy to ensure that businesses are compliant with medical device excise tax filing and payment requirements and has taken several measures to advise medical device manufacturers of the new excise tax.

“However, the IRS cannot identify the population of medical device manufacturers registered with the Food and Drug Administration that are required to file a Form 720 and pay the excise tax.”

The Affordable Care Act provides for an excise tax equal to 2.3 percent of the sales price for medical devices sold beginning Jan. 1, 2013. Manufacturers, producers and importers are responsible for collecting the tax and filing a Form 720, Quarterly Federal Excise Tax Return.

The term “device” can apply to devices, instruments, products, materials and substances, according to the ADA Division of Legal Affairs. Dentists are not responsible for assessing or collecting the tax and they are not responsible for reporting it to the government. See Excise Tax Alert at ADA.org for more information relevant to dentistry and dental devices.

IRS implementation of the tax has been difficult and challenging, according to Treasury’s Inspector General.

“In addition, processing controls do not ensure the accuracy of medical device excise tax figures reported on paper-filed Forms 720. Our analysis of 5,107 Forms 720 processed for the quarters ending March 31 and June 30, 2013, identified discrepancies in the amount of the medical device excise tax and/or taxable sales amount captured from 276 paper-filed returns,” said a “highlights” summary.

“TIGTA identified medical device excise tax discrepancies totaling almost $117.8 million when comparing the excise tax amount captured by the IRS from the Form 720 to the excise tax amount TIGTA calculated.

“Finally, the IRS erroneously assessed 219 failures to deposit penalties totaling $706,753 against businesses filing a Form 720 for the quarters ending March 31 and June 30, 2013, which was designated a penalty relief period. The IRS had reversed 133 of the 219 penalty assessments. When TIGTA alerted the IRS of the remaining 86 penalties, IRS management reversed the penalties and issued apology letters to the affected taxpayers.”

IRS management’s response appended to the audit report said in part, “We agree with your recommendations and appreciate your acknowledgement of the efforts we have already made to implement this provision. These efforts include developing a comprehensive implementation plan, revising forms and instructions, delivering education and outreach, and training personnel. As a result, we were prepared for the initial filing year challenges associated with the new excise tax on medical devices.”

The audit redacted for public release is available at treasury.gov/tigta.