Part of the Affordable Care Act Legislation imposed an excise tax of 2.3% on the sales price for medical devices in 2013. This excise tax impacts manufacturers, producers, and importers, as they must collect the 2.3% excise tax and submit Form 270, Quarterly Federal Excise Tax Return. This excise tax, based on the Joint Committee on Taxation, is estimated to bring in $20 billion from 2013-2019.
The Treasury Inspector General for Tax Administration recently released a report on an audit that was completed to assess how the IRS is processing tax returns that report the new excise tax and to identify noncompliance (if any). TIGTA found out that medical device excise tax revenues are much lower than were anticipated. They also found out that the IRS cannot even identify all the medical device manufacturers that have registered with the FDA that must file Form 270.
TIGTA audited 5,107 Quarterly Federal Excise Tax Return Forms from Q1 and Q2 (quarters ending March 31st and June 30, 2013) and discovered that their were discrepancies with 276 tax returns. Although only 5% of total tax returns audited had discrepancies, it amounts to $117.8 million in lost tax revenue when tax return figures were compared to figures reported on Form 720.
TIGTA also discovered that the IRS incorrectly assessed 219 failure to deposit penalties, amounting to about $706k for Q1 and Q2 of this year, which were technically penalty relief periods. Although the IRS had originally credited firms for 133 incorrect penalty assessments, 86 penalty assessments were still in error and the IRS immediately reversed the penalties once TIGTA alerted the IRS.
The final recommendations for TIGTA to the IRS were:
- Refine compliance strategy to catch noncompliance
- Create a process to make sure Forms 720 excise tax amounts are correct
- Figure out the proper excise tax owed for the 276 returns that had discrepancies
The IRS agreed with all of TIGTA’s recommendations.