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entitled 'Small Employer Health Tax Credit: Factors Contributing to 
Low Use and Complexity' which was released on May 21, 2012. 

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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

May 2012: 

Small Employer Health Tax Credit: 

Factors Contributing to Low Use and Complexity: 

GAO-12-549: 

GAO Highlights: 

Highlights of GAO-12-549, a report to congressional requesters. 

Why GAO Did This Study: 

Many small employers do not offer health insurance. The Small Employer 
Health Insurance Tax Credit was established to help eligible small 
employers-—businesses or tax-exempt entities—-provide health insurance 
for employees. The base of the credit is premiums paid or the average 
premium for an employer’s state if premiums paid were higher. In 2010, 
for small businesses, the credit was 35 percent of the base unless the 
business had more than 10 FTE employees or paid average annual wages 
over $25,000. 

GAO was asked to examine (1) the extent to which the credit is claimed 
and any factors that limit claims, including how they can be 
addressed; (2) how fully IRS is ensuring that the credit is correctly 
claimed; and (3) what data are needed to evaluate the effects of the 
credit. 

GAO compared IRS data on credit claims with estimates of eligible 
employers, interviewed various credit stakeholders and IRS officials 
as well as academicians on evaluation, compared IRS credit compliance 
documents with the rules and practices used for prior tax provisions 
and IRS strategic objectives, and reviewed literature and data. 

What GAO Found: 

Fewer small employers claimed the Small Employer Health Insurance Tax 
Credit in tax year 2010 than were estimated to be eligible. While 
170,300 small employers claimed it, estimates of the eligible pool by 
government agencies and small business advocacy groups ranged from 1.4 
million to 4 million. The cost of credits claimed was $468 million. 
Most claims were limited to partial rather than full percentage 
credits (35 percent for small businesses) because of the average wage 
or full-time equivalent (FTE) requirements. As shown in the figure, 
28,100 employers claimed the full credit percentage. In addition, 30 
percent of claims had the base premium limited by the state premium 
average. 

Figure: Number of Small Employers Claiming the Full and Partial Credit 
Percentages, by FTE and Wage Requirements for the Credit, Tax Year 
2010: 

[Refer to PDF for image: illustrated table] 

Employer average annual wages: Over $25,000; 
Employer FTEs: 
10 or fewer: Partial credit percentage: 115,500; 
More than 10: Partial credit percentage: 20,800. 

Employer average annual wages: $25,000 or less; 
Employer FTEs: 
10 or fewer: Full credit percentage: 28,100; 
More than 10: Partial credit percentage: 6,000. 

Source: GAO analysis of IRS data on Form 8941. 

Notes: This information is based on the approximately 170,300 small 
employer claims. Numbers are rounded to the nearest hundred. Numbers 
don’t add up because of rounding. 

[End of figure] 

One factor limiting the credit’s use is that most very small 
employers, 83 percent by one estimate, do not offer health insurance. 
According to employer representatives, tax preparers, and insurance 
brokers that GAO met with, the credit was not large enough to 
incentivize employers to begin offering insurance. Complex rules on 
FTEs and average wages also limited use. In addition, tax preparer 
groups GAO met with generally said the time needed to calculate the 
credit deterred claims. Options to address these factors, such as 
expanded eligibility requirements, have trade-offs, including less 
precise targeting of employers and higher costs to the Federal 
government. 

The Internal Revenue Service (IRS) incorporated practices used 
successfully for prior tax provisions and from IRS strategic 
objectives into its compliance efforts for the credit. However, the 
instructions provided to its examiners (1) do not address the credit’s 
eligibility requirements for employers with non-U.S. addresses and (2) 
have less detail for reviewing the eligibility of tax-exempt entities’ 
health insurance plans compared to those for reviewing small business 
plans. These omissions may cause examiners to overlook or 
inconsistently treat possible noncompliance. Further, IRS does not 
systematically analyze examination results to understand the types of 
errors and whether examinations are the best way to correct each type. 
As a result, IRS is less able to ensure that resources target errors 
with the credit rather than compliant claimants. 

Currently available data on health insurance that could be used to 
evaluate the effects of the credit do not match the credit’s 
eligibility requirements, such as information to convert data on 
number of employees to FTEs. Additional data that would need to be 
collected depend on the questions policymakers would want answered and 
the costs of collecting such data. 

What GAO Recommends: 

GAO recommends that IRS (1) improve instructions to examiners working 
on cases on the credit and (2) analyze results from examinations of 
credit claimants and use those results to identify and address any 
errors through alternative approaches. IRS agreed with GAO’s 
recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-12-549]. For more 
information, contact James R. White at (202) 512-9110 or 
whitej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Fewer Small Employers Claimed the Credit Than Were Thought to Be 
Eligible Because of Factors Such as Credit Size and Complexity: 

IRS Is Implementing Several Practices from Prior Compliance Efforts, 
but Additional Steps Could Be Taken: 

Data to Evaluate Many Questions about the Effects of the Credit Are 
Not Available: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: State Average Premiums for Small Group Markets for 2010 
and 2011: 

Appendix III: Adjustments in Counting Total Small Employer Claims and 
Total Credit Amount Claims for Tax Year 2010: 

Appendix IV: Credit Claims by Employer Size and Wages Paid, Tax Year 
2010: 

Appendix V: Form 8941 and Worksheets for Claiming the Small Employer 
Health Insurance Tax Credit: 

Appendix VI: Publicly Available Data on Small Employer Health 
Insurance: 

Appendix VII: Comments from the Internal Revenue Service: 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Examination Actions for Form 8941 as of February 2012, for 
Tax Year 2010: 

Table 2: State Average Premiums for Small Group Markets for 2010 and 
2011: 

Table 3: Publicly Available Data on Small Employer Health Insurance: 

Figures: 

Figure 1: Percentage of Employers with Low-Wage Employees That Offer 
Health Insurance, 2000 through 2010, by Employer Size: 

Figure 2: Phaseout of the Credit for Small Businesses as a Percentage 
of Employer Contributions to Premiums, for 2010 to 2013: 

Figure 3: Percentage and Number of Small Employers Claiming the Full 
and Partial Credit Percentages, by FTE and Wage Requirements for the 
Credit, Tax Year 2010: 

Figure 4: Form 8941 and Credit Calculations on Worksheets Related to 
IRS's "3 Simple Steps" for Determining Potential Eligibility: 

Figure 5: Model of Potential Outcomes and Influential Factors for the 
Small Employer Health Insurance Tax Credit: 

Figure 6: Number of Credit Claims by Taxpayer Type, Tax Year 2010: 

Abbreviations: 

CBO: Congressional Budget Office: 

COBRA: Consolidated Omnibus Budget Reconciliation Act: 

FTE: full-time equivalent: 

HHS: Department of Health and Human Services: 

IRS: Internal Revenue Service: 

JCT: Joint Committee on Taxation: 

MEA: Math Error Authority: 

MEPS: Medical Expenditure Panel Survey: 

NFIB: National Federation of Independent Businesses: 

PPACA: Patient Protection and Affordable Care Act: 

SBA: Small Business Administration: 

SBM: Small Business Majority: 

SB/SE: Small Business and Self-Employed Division: 

TEGE: Tax Exempt and Government Entities Division: 

TETR: Telephone Excise Tax Refund: 

TIGTA: Treasury Inspector General for Tax Administration: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

May 14, 2012: 

The Honorable Olympia J. Snowe: 
Ranking Member: 
Committee on Small Business and Entrepreneurship: 
United States Senate: 

The Honorable Sam Graves: 
Chairman: 
Committee on Small Business: 
House of Representatives: 

Many small employers do not offer health insurance to their employees. 
This is particularly true for small employers paying low wages. 
According to data from the Medical Expenditure Panel Survey (MEPS) 
[Footnote 1] To provide an incentive for small employers to provide 
health insurance, and to make insurance more affordable, Congress 
included the Small Employer Health Insurance Tax Credit (referred to 
in this report as the credit) in the Patient Protection and Affordable 
Care Act (PPACA). about 17 percent of employers with less than 10 
employees who earn low wages (50 percent or more of their employees 
earn $11.50 per hour or less) offered health insurance to their 
employees in 2010, while about 90 percent of employers with 100 to 999 
employees who earn low wages did. 

To provide an incentive for small employers to provide health insurance,
and to make insurance more affordable, Congress included the Small
Employer Health Insurance Tax Credit (referred to in this report as the
credit) in the Patient Protection and Affordable Care Act (PPACA). 
[Footnote 2] The credit is available for tax years beginning after 
December 31, 2009 to certain employers with employees earning low 
wages—-small business and tax-exempt entities—-that pay at least half 
of their employees’ health insurance premiums. The Congressional 
Budget Office (CBO) and the Joint Committee on Taxation (JCT) jointly 
estimated that the credit would cost $2 billion in fiscal year 2010 
and $40 billion from fiscal years 2010 to 2019.[Footnote 3] 

You asked us to review the implementation of the credit. Specifically, 
we examined: 

* to what extent the credit is being claimed and what factors, if any, 
limit employer claims, and how these factors can be addressed; 

* how fully the Internal Revenue Service (IRS) is ensuring that the 
credit is correctly claimed by eligible employers; and: 

* what data are needed to evaluate the effects of the credit. 

To describe the extent to which the credit is being claimed, we 
reviewed IRS data on the claims for tax year 2010. To identify any 
factors that may limit credit claims and to assess how they could be 
addressed, we interviewed IRS officials as well as groups representing 
employers, tax preparers, and insurance brokers, and worked with them 
to assemble discussion groups on the credit. To assess how these 
factors could be addressed, we analyzed our interview results as well 
as relevant documents. Where possible, we identified IRS or MEPS data 
related to the factors. To assess how IRS is ensuring that the tax 
credit is correctly claimed by eligible employers we reviewed its 
compliance plans for the credit and compared them to practices used 
successfully for prior tax provisions[Footnote 4] and IRS strategic 
objectives. We interviewed IRS officials on their compliance efforts. 
To assess what data would be needed to evaluate the effects of the 
credit, we conducted a literature review and interviewed interest 
groups and subject matter specialists from government, academia, 
research foundations and think tanks. We found the data we used to be 
sufficiently reliable for the purposes of our report. 

We conducted this performance audit from July 2011 through May 2012 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. (See appendix 
I for our scope and methodology.) 

Background: 

Small Employer Health Insurance Market: 

Small employers with low-wage employees do not commonly offer health 
insurance, compared with large employers with low-wage employees, as 
shown in figure 1. 

Figure 1: Percentage of Employers with Low-Wage Employees That Offer 
Health Insurance, 2000 through 2010, by Employer Size: 

[Refer to PDF for image: multiple line graph] 

Year: 2000; 
Number of employees: 
Less than 10: 25%; 
10 to 24: 46%; 
25 to 99: 73.5%; 
100 to 999: 94.2%; 
1,000 or more: 96.4%. 

Year: 2001; 
Number of employees: 
Less than 10: 23%; 
10 to 24: 44%; 
25 to 99: 69.2%; 
100 to 999: 92.9%; 
1,000 or more: 98.7%. 

Year: 2002; 
Number of employees: 
Less than 10: 22%; 
10 to 24: 41%; 
25 to 99: 64.4%; 
100 to 999: 91.8%; 
1,000 or more: 94.9%. 

Year: 2003; 
Number of employees: 
Less than 10: 20%; 
10 to 24: 39%; 
25 to 99: 62.1%; 
100 to 999: 90.4%; 
1,000 or more: 99.4%. 

Year: 2004; 
Number of employees: 
Less than 10: 18%; 
10 to 24: 38%; 
25 to 99: 61.9%; 
100 to 999: 90.2%; 
1,000 or more: 98.2%. 

Year: 2005; 
Number of employees: 
Less than 10: 19%; 
10 to 24: 38%; 
25 to 99: 63.3%; 
100 to 999: 88%; 
1,000 or more: 98.3%. 

Year: 2006; 
Number of employees: 
Less than 10: 19%; 
10 to 24: 34%; 
25 to 99: 62.2%; 
100 to 999: 86.8%; 
1,000 or more: 97.2%. 

Year: 2008; 
Number of employees: 
Less than 10: 18%; 
10 to 24: 37%; 
25 to 99: 60.1%; 
100 to 999: 91.4%; 
1,000 or more: 98%. 

Year: 2009; 
Number of employees: 
Less than 10: 18%; 
10 to 24: 33%; 
25 to 99: 59.5%; 
100 to 999: 88.7%; 
1,000 or more: 98.5%. 

Year: 2010; 
Number of employees: 
Less than 10: 17%; 
10 to 24: 33%; 
25 to 99: 60%; 
100 to 999: 89.5%; 
1,000 or more: 99%. 

Source: MEPS 2000 to 2010 data. 

Notes: Figure includes for-profit and nonprofit (tax-exempt) entities 
but not government entities. A low-wage employer is defined as an 
employer that has 50 percent or more of its employees earning a low 
wage (earning $11.50 per hour or less, which is an annual salary of, 
at most, about $23,920). Data were not collected for the MEPS 
Insurance Component for 2007. 

[End of figure] 

A combination of factors explains why small, low-wage employers tend 
not to offer health insurance.[Footnote 5] 

* For very low-wage employees, such as minimum wage employees, 
[Footnote 6] health insurance drives up total compensation costs for 
employees. 

* Low-wage employees working for small employers generally prefer to 
receive wages over insurance benefits as part of total compensation. 
On one hand, while employees pay both income and employment tax on 
wages, employees do not have to pay income or employment taxes on 
premiums paid by their employers for health insurance. However, for 
low-wage employees, the income tax exclusion is worth less relative to 
cash wages than for higher-income employees because low-wage employees 
may be in a lower income tax bracket.[Footnote 7] 

* Insurers of small employers face higher per-employee fixed costs for 
billing and marketing[Footnote 8] and are less able to pool 
risk[Footnote 9] across large numbers of employees. As a result, plans 
offered to small employers are likely to have higher premiums or have 
less coverage and higher out-of-pocket costs than plans offered to 
large employers.[Footnote 10] 

IRS Implementation and Requirements for Calculating and Claiming the 
Credit: 

IRS's Small Business and Self-Employed Division (SB/SE) and Tax Exempt 
and Government Entities Division (TEGE) are primarily responsible for 
implementing the credit. IRS works with the Department of Health and 
Human Services (HHS) and the Small Business Administration (SBA) on 
implementation tasks, such as outreach and communication. 

To be eligible, an employer must: 

* Be a small business[Footnote 11] or tax-exempt employer[Footnote 12] 
located in or having trade or business income in the United States and 
pay premiums for employee health insurance coverage issued in the 
United States. 

* Employ fewer than 25 full-time-equivalent (FTE)[Footnote 13] 
employees in the tax year (excluding certain employees, such as 
business owners and their family members).[Footnote 14] 

* Pay average annual wages of less than $50,000 per FTE in the tax 
year.[Footnote 15] 

* Offer health insurance and pay at least 50 percent of the health 
insurance premium under a "qualifying arrangement." This means that 
the employer uniformly pays at least 50 percent of the cost of 
premiums for enrolled employees, although IRS did develop relaxed 
criteria for meeting this requirement for tax year 2010.[Footnote 16] 

The President's fiscal year 2013 budget request contains a proposal 
for expanding the credit's eligibility criteria to include employers 
with 50 or fewer FTEs and removing the uniform contribution 
requirement. 

Limits on the Credit Amount: 

The amount of the credit that employers can claim depends on several 
factors. Through 2013, small businesses can receive up to 35 percent 
and tax-exempt entities can receive up to 25 percent of their base 
payments for employee health insurance premiums; these portions rise 
to 50 percent and 35 percent, respectively, starting in 2014. 
Employers can receive the full credit percentage if they have 10 or 
fewer FTEs and pay an average of $25,000 or less in annual wages; 
employers with 11 to 25 FTEs and average wages exceeding $25,000 up to 
$50,000 are eligible for a partial credit that "phases" out to zero 
percent of premium payments as the FTE and wage amounts rise. Figure 2 
shows the phaseout of the credit for small businesses; the phaseout 
for tax-exempt entities follows a similar pattern, up to 25 percent of 
health insurance premiums. 

Figure 2: Phaseout of the Credit for Small Businesses as a Percentage 
of Employer Contributions to Premiums, for 2010 to 2013: 

[Refer to PDF for image: table] 
      
Number of FTEs: 10 and fewer 
Average wage: 
$25,000 and less: 35% 
$30,000: 28%; 
$35,000: 21%; 
$40,000: 14%; 
$45,000: 7%; 
$50,000: 0%. 

Number of FTEs: 11; 
Average wage: 
$25,000 and less: 33%; 
$30,000: 26%; 
$35,000: 19%; 
$40,000: 12%; 
$45,000: 5%; 
$50,000: 0%. 

Number of FTEs: 12; 
Average wage: 
$25,000 and less: 30%; 
$30,000: 23%; 
$35,000: 16%; 
$40,000: 9%; 
$45,000: 2%; 
$50,000: 0%. 

Number of FTEs: 13; 
Average wage: 
$25,000 and less: 28%; 
$30,000: 21%; 
$35,000: 14%; 
$40,000: 7%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 14; 
Average wage: 
$25,000 and less: 26%; 
$30,000: 19%; 
$35,000: 12%; 
$40,000: 5%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 15; 
Average wage: 
$25,000 and less: 23%; 
$30,000: 16%; 
$35,000: 9%; 
$40,000: 2%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 16; 
Average wage: 
$25,000 and less: 21%; 
$30,000: 14%; 
$35,000: 7%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 17; 
Average wage: 
$25,000 and less: 19%; 
$30,000: 12%; 
$35,000: 5%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 18; 
Average wage: 
$25,000 and less: 16%; 
$30,000: 9%; 
$35,000: 2%; 
$40,000: 0%; 
$45,000: 0%; 
0%. 

Number of FTEs: 19; 
Average wage: 
$25,000 and less: 14%; 
$30,000: 7%; 
$35,000: 0%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 20; 
Average wage: 
$25,000 and less: 12%; 
$30,000: 5%; 
$35,000: 0%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 21; 
Average wage: 
$25,000 and less: 9%; 
$30,000: 2%; 
$35,000: 0%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 22; 
Average wage: 
$25,000 and less: 7%; 
$30,000: 0%; 
$35,000: 0%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 23; 
Average wage: 
$25,000 and less: 5%; 
$30,000: 0%; 
$35,000: 0%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 24; 
Average wage: 
$25,000 and less: 2%; 
$30,000: 0%; 
$35,000: 0%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 

Number of FTEs: 25; 
Average wage: 
$25,000 and less: 0%; 
$30,000: 0%; 
$35,000: 0%; 
$40,000: 0%; 
$45,000: 0%; 
$50,000: 0%. 
       
Source: Congressional Research Service. 

Note: GAO adapted the graphic from Congressional Research Service, 
Summary of the Small Business Health Insurance Tax Credit Under PPACA 
(P.L. 111-148) (Washington, D.C.: Apr. 5, 2010). 

[End of figure] 

Further, the amount of the credit is limited if the premiums paid by 
an employer are more than the average premiums determined by HHS for 
the small group market in the state in which the employer offers 
insurance. The credit percentage is multiplied by the allowable 
premium to calculate the dollar amount of credit claimed. For example, 
in Alabama, the state average premium was $4,441 for a single employee 
in 2010. If an employer claiming the credit in Alabama paid $5,000 for 
a single employee's health premium, the credit would be calculated 
using the state average premium of $4,441 rather than the actual 
premium paid. Appendix II shows the average premiums by state. 

The proposal in the President's Budget suggests beginning the phaseout 
at 21 FTEs, rather than 11, as well as providing for a more gradual 
combined phaseout for the credit percentages and removing the state 
market limits. 

Process for Claiming the Credit: 

Employers are to calculate the credit amount on IRS Form 8941, "Credit 
for Small Employer Health Insurance Premiums." Small businesses are to 
claim the credit as part of the general business tax credit (on Form 
3800), and use it to offset actual tax liability. If they do not have 
a federal tax liability, they cannot receive the credit as a refund 
but may carry the credit forward or back to offset tax liabilities for 
other years.[Footnote 17] Credit amounts claimed by partnerships and S 
corporations are to be passed through to their partners and 
shareholders, respectively,[Footnote 18] who may claim their portions 
of the credit on their individual income tax returns.[Footnote 19] Tax-
exempt entities are to claim the credit on Form 990-T, "Exempt 
Organization Business Income Tax Return," and receive the credit as a 
refund even though the employer has no taxable income. 

Employers that claim the credit can also deduct health insurance 
expenses on their tax returns but must subtract the amount of the 
credit from the deduction. Employers can claim the credit for up to 6 
years--the initial 4 years from 2010 through 2013 and any 2 
consecutive years after 2013 if they buy insurance through the Small 
Business Health Option Programs, which are part of the insurance 
exchanges to be established under PPACA.[Footnote 20] 

Fewer Small Employers Claimed the Credit Than Were Thought to Be 
Eligible Because of Factors Such as Credit Size and Complexity: 

Actual Credit Claims Were Much Lower Than Initial Rough Eligibility 
Estimates: 

Fewer small employers claimed the credit for tax year 2010 than were 
thought to be eligible based on rough estimates of eligible employers 
made by government agencies and small business groups. IRS data on 
total claimants, adjusted to account for claims by partners and 
shareholders, show that about 170,300 small employers made claims for 
the credit in 2010.[Footnote 21] (See appendix III for adjustments to 
determine claims filed by employers.) The average credit amount 
claimed was about $2,700. Limited information is available on the 
distribution of claim amounts for business entities because IRS 
focuses its data collection on the taxpayers filing credit claims, who 
may be partners or shareholders claiming their portions of a business 
entity's credit. Appendix III provides additional detail. 

Selected estimates, made by government agencies and small business 
groups, of employers eligible for the credit range from around 1.4 
million to 4 million. However, data limitations mean that these 
estimates are necessarily rough. Based on our review of available data 
sources on the three basic eligibility rules for the credit--involving 
wages, FTEs, and health insurance--it is not possible to combine data 
from various sources to closely match these rules. (See appendix VI 
for details.) Though statistical modeling corrects for imperfect data 
to match these rules, models are not precise. While acknowledging the 
data limitations, several entities produced estimates of the number of 
employers potentially eligible for the credit. The Council of Economic 
Advisors estimated 4 million and SBA estimated 2.6 million.[Footnote 
22] Other groups making estimates included small business groups such 
as the Small Business Majority (SBM) and the National Federation of 
Independent Businesses (NFIB). Their estimates were 4 million and 1.4 
million, respectively.[Footnote 23] 

A similar pattern is seen when the dollar value of credits actually 
claimed is compared to initial estimates. The dollar value of claims 
made in 2010 was $468 million compared to initial cost estimates of $2 
billion for 2010 (a CBO and JCT joint estimate).[Footnote 24] 

Most Small Employer Claims Were Reduced Because of the Phaseout Rules 
and Some Were Reduced by the State Average Premiums: 

[Side bar: Credit Phaseout: 

(In reference to the phaseout) 
"People get excited that they're eligible and then they do the 
calculations and it's like the bottom just falls out of it and it's 
not really there. It's almost like a wish that they might get it and 
then they do the calculations and it's not worth it for them."-—Health 
insurance discussion group participant. End of side bar] 

Most of the claims were for less than the full credit percentage. Of 
the approximately 170,300 small employers making claims for tax year 
2010, 142,200--83 percent--could not use the full credit percentage. 
Usually employers could not meet the average wage requirement to claim 
the full percentage, as about 68 percent did not qualify based on 
wages but did meet the FTE requirement. (See figure 3.)[Footnote 25] 

Figure 3: Percentage and Number of Small Employers Claiming the Full 
and Partial Credit Percentages, by FTE and Wage Requirements for the 
Credit, Tax Year 2010: 

[Refer to PDF for image: illustrated table] 

Employer average annual wages: Over $25,000; 
Employer FTEs: 
10 or fewer: Partial credit percentage: 115,500; 
More than 10: Partial credit percentage: 20,800. 

Employer average annual wages: $25,000 or less; 
Employer FTEs: 
10 or fewer: Full credit percentage: 28,100; 
More than 10: Partial credit percentage: 6,000. 

Source: GAO analysis of IRS data on Form 8941. 

Notes: This information is based on the approximately 170,300 small 
employer claims. Numbers are rounded to the nearest hundred. Numbers 
and percentages do not add to totals because of rounding. 

[End of figure] 

[Side bar: State Averages as Caps on the Credit: 

"I don't know where that number (the state average) comes from but 
that's supposed to be the average cost, and that seems pretty low, 
which is reducing that tax credit amount they would qualify for." -—
Health insurance discussion group participant. End of side bar] 

State average premiums also reduced some credit amounts by reducing 
the amount of the premium base against which the credit percentage is 
applied. This premium base may be reduced when it exceeds the state 
average premiums for small group plans,[Footnote 26] as determined by 
HHS. If so, small employers are to use the state average amount, which 
in essence caps the premium amount used to calculate their credit. 
According to IRS data, this cap reduced the credit for around 30 
percent of employer claims. For example, a nonprofit representative 
told us that her credit dropped from $7,900 to $3,070 because of the 
cap in her state. (See appendix II for small group average premiums in 
all states.) 

Most Small Employers Could Not Meet the Health Insurance Requirement 
for the Credit and the Credit Was Not Seen as an Incentive to Start 
Offering Insurance: 

[Side bar: Small, Low-Wage Employers Not Commonly Offering Health 
Insurance: 
"Very few people are going to pay 50 or 100 percent of the health 
insurance for someone making $25,000 or less. We just don't have that 
many clients who even start to qualify."-—Tax preparer discussion 
group participant. End of side bar] 

As already discussed, small employers do not commonly offer health 
insurance. MEPS estimates that 83 percent of employers who may 
otherwise be eligible for the full credit[Footnote 27] did not offer 
health insurance in 2010 and that 67 percent of employers who could be 
eligible for the partial credit[Footnote 28] did not offer insurance. 
Our discussion groups and other interviewees confirmed this, with 
comments and examples of small, low-wage employers not offering health 
insurance to employees. 

Furthermore, the small employers do not likely view the credit as a 
big enough incentive to begin offering health insurance and to make a 
credit claim, according to employer representatives, tax preparers, 
and insurance brokers we met with. While some small employers could be 
eligible for the credit if they began to offer health insurance, small 
business group representatives and discussion group participants told 
us that the credit may not offset costs enough to justify a new outlay 
for health insurance premiums. Related to this concern, the credit 
being available for 6 years overall and just 2 consecutive years after 
2014 further detracts from any potential incentive to small employers 
to start offering health insurance in order to claim the credit. 

Complexity Deterred Small Employer Claims, According to Discussion 
Groups: 

[Side bar: Complexity of the Credit: 
"Any credit that needs a form that takes 25 lines and seven work 
sheets to build to those 25 lines is too complicated."-—Tax preparer 
discussion group participant. End of side bar] 

Most discussion group participants and groups we interviewed found the 
tax credit to be complicated, deterring small employers from claiming 
it. The complexity arises from the various eligibility requirements, 
the various data that must be recorded and collected, and number of 
worksheets to be completed. 

A major complaint we heard centered on gathering information for and 
calculating FTEs and the health insurance premiums associated with 
those FTEs. Eligible employers reportedly did not have the number of 
hours worked for each employee readily available to calculate FTEs and 
their associated average annual wages nor did they have the required 
health insurance information for each employee readily available. 
Exclusions from the definition of "employee" and other rules make the 
calculations complex. For example, seasonal employees are excluded 
from FTE counts but insurance premiums paid on their behalf count 
toward the employer's credit. Incorporating the phaseout also 
complicates the credit calculation. 

[Side bar: Gathering Information for the Credit Calculation: 
(Small business owners) "Are trying to run their businesses and 
operate and make a profit, and when you tell them they need to take 2, 
3, 4 hours to gather this information, they just shake their head and 
say, `no, I'm not going to do it'."-—Tax preparer discussion group 
participant. End of side bar] 

In our discussion groups with tax preparers, we heard that small 
business owners generally do not want to spend the time or money to 
gather the necessary information to calculate the credit, given that 
the credit will likely be insubstantial. Tax preparers told us it 
could take their clients from 2 to 8 hours or possibly longer to 
gather the necessary information to calculate the credit and that the 
tax preparers spent, in general, 3 to 5 hours calculating the 
credit.[Footnote 29] We did hear from a couple of participants--a 
small business owner and a nonprofit representative--that they did not 
find the credit overly burdensome. 

Tax preparers we interviewed said that IRS did the best it could with 
the Form 8941 given the credit's complexity. IRS officials said they 
did not receive criticism about Form 8941 itself but did hear that the 
instructions and its seven worksheets were too long and cumbersome for 
some claimants and tax preparers. On its website, IRS tried to reduce 
the burden on taxpayers by offering "3 Simple Steps" as a screening 
tool to help taxpayers determine whether they might be eligible for 
the credit. However, to calculate the actual dollars that can be 
claimed, the three steps become 15 calculations, 11 of which are based 
on seven worksheets, some of which request multiple columns of 
information. Figure 4 aligns IRS's "3 Simple Steps," with the seven 
worksheets in the instructions for Form 8941 and the lines on Form 
8941. (See appendix V for full text for this figure.) 

Figure 4: Form 8941 and Credit Calculations on Worksheets Related to 
IRS's "3 Simple Steps" for Determining Potential Eligibility: 

[Refer to PDF for image: interactive graphic] 

Source: GAO analysis of IRS information. 

To view and print full noninteractive versions of IRS Form 8941 and 
worksheets included in this graphic, go to appendix V. 

[End of figure] 

Given the effort involved to make a claim and the uncertainty about 
the credit amounts, a few discussion group participants said it would 
be helpful to be able to quickly estimate employers' eligibility for 
the credit and the amount they might receive; this would help them to 
decide whether the credit would be worth the effort, although this 
would not reduce the complication of filing out Form 8941 because, to 
fill out the form, full documentation would need to be reviewed. IRS's 
Taxpayer Advocate Service[Footnote 30] is developing a calculator for 
IRS's website to quickly estimate an employer's eligibility, but this 
will still require gathering information such as wages, FTEs, and 
insurance plans. We also heard concerns that a calculator could cause 
confusion for clients who find they are eligible when quickly 
estimating the credit but then turn out to be ineligible or find they 
are eligible for a smaller credit when their accountant fills out Form 
8941. 

The Extent to Which Lack of Awareness Is a Factor Limiting More Claims 
Is Unknown, Although IRS Did Significant Outreach: 

Many small businesses reported that they were unaware of the credit. 
The NFIB Research Foundation[Footnote 31] and the Kaiser Family 
Foundation both estimated that approximately 50 percent of small 
businesses were aware of the credit, as of May 2011, or more than 1 
year after Congress authorized this credit.[Footnote 32] 

The extent to which being unaware prevented eligible employers from 
claiming the credit for tax year 2010 is not known. Some discussion 
group participants raised concerns about unawareness, but they also 
cited other factors limiting credit claims for tax year 2010. If 50 
percent of small businesses knew about the credit, then the 
approximately 170,300 claims is a relatively small proportion of those 
that were knowledgeable. This indicates that other factors contributed 
to employers not claiming the credit. Further, it is hard to interpret 
the impact of awareness on claims because these surveys included an 
unknown number of small business employers that would not be eligible 
for the credit regardless of their awareness. For those employers that 
were unaware, the surveys did not account for their accountants or tax 
preparers that may have known about the credit but did not tell their 
clients about it because they did not believe their clients would 
qualify or because the credit amount would be very small. In addition, 
the surveys did not cover tax-exempt entities. 

To raise awareness of the credit, IRS did significant outreach. IRS 
developed a communication and outreach plan, written materials on the 
credit, a video, and a website. IRS officials also reached out to 
interest groups about the credit and developed a list of target 
audiences and presentation topics. IRS officials began speaking at 
events in April 2010 to discuss the credit and attended over 1,500 in-
person or web-based events from April 2010 to February 2012. 
Discussion of the credit at the events varied from being a portion of 
a presentation covering many topics to some events that focused on the 
credit with a dedicated discussion period. 

IRS does not know whether its outreach efforts actually increased 
awareness of the credit or were otherwise cost-effective. It would be 
challenging to estimate the impact of IRS's outreach efforts on 
awareness with a rigorous methodology; however, based on ongoing 
feedback they received from interest groups, IRS officials told us 
they believe their efforts have been worthwhile. IRS used some 
feedback from focus groups of tax preparers and from other sources 
[Footnote 33] to revise its outreach efforts. For example, IRS 
modified its outreach from initially focusing on tax preparers and 
small employers to including insurance brokers in 2012. 

Addressing Factors and Expanding Credit Use May Require Substantive 
Design Changes: 

Given that most small employers do not offer insurance and what we 
heard about the size of the credit not being big enough to incentivize 
offering health insurance,[Footnote 34] it may not be possible to 
significantly expand credit use without changing the credit's 
eligibility. Most claims were for partial credits and many people we 
spoke with view the credit amount as too small and temporary to 
justify providing health insurance when none is provided now. In 
addition, given that IRS has conducted extensive outreach about the 
credit, it is not likely that more outreach would significantly 
increase the number of businesses claiming the credit. Amending the 
eligibility requirements or increasing the amount of the credit may 
allow more businesses to take advantage of the credit,[Footnote 35] 
but these changes would increase its cost to the Federal government. 
Options include the following: 

* Increasing the amount of the full credit, the partial credit, or 
both. 

* Increasing the amount of the credit for some by eliminating state 
premium averages. 

* Expanding eligibility requirements by increasing the number of FTEs 
and wage limit allowable for employers to claim the partial credit, 
the full credit, or both. This expansion would not, however, likely 
affect the smallest employers which do not offer health insurance. 

* Simplifying the calculation of the credit in the following ways: 

- Using the number of employees and wage information already reported 
on the employer's tax return. This could reduce the amount of data 
gathering as well as credit calculations because eligibility would be 
based on the number of employees and not FTEs. A trade-off with this 
option would be less precision in targeting the full and partial 
credit amount to specific small employer subgroups.[Footnote 36] 

- Offering a flat credit amount per FTE (or number of employees) 
rather than a percentage, which would reduce the precision in 
targeting the credit. 

The data limitations that made it difficult to estimate the number of 
businesses eligible for the current credit also make it difficult to 
estimate the impact of any design changes. 

IRS Is Implementing Several Practices from Prior Compliance Efforts, 
but Additional Steps Could Be Taken: 

IRS Incorporated Practices from Strategic Objectives and Prior 
Compliance Efforts: 

IRS's compliance efforts for the credit incorporate practices that 
have been shown effective in helping to ensure compliance with other 
tax provisions or are consistent with IRS strategic objectives. Some 
of those practices were used for the Telephone Excise Tax Refund 
(TETR)[Footnote 37] and Consolidated Omnibus Budget Reconciliation Act 
(COBRA) subsidies for health insurance for the unemployed, according 
to IRS officials.[Footnote 38] Specifically, IRS is doing the 
following: 

* Using computerized filters to review credit claims on Forms 8941 for 
certain errors or potential problems that may trigger an examination 
of the claim. 

* Transcribing more lines of data from Form 8941 into IRS computer 
systems which should make the filters more effective. Although 
transcribing more lines increases processing and data storage costs, 
IRS plans to transcribe more lines for tax years 2011 and 2012 claims 
to ensure better verification of eligibility. 

* Freezing refunds of tax-exempt entities whose returns have been 
selected for examination, which avoids the costs of trying to recover 
funds. Footnote 39] 

* Considering the documentation burden on claimants. IRS did not 
require claimants to submit documentation on health insurance premiums 
with their Form 8941 because IRS officials said they will review 
examination results and may revisit the decision not to require 
documentation if results suggest that such documentation would improve 
compliance checks. 

* Modifying filters, as needed, in response to observed trends. For 
example, a filter that applies to tax-exempt organization claims was 
tripped by about a quarter of claimant organizations, as of December 
31, 2011. IRS officials said some eligible tax-exempt entities tripped 
the filter because it was too broad. To address this, IRS modified the 
filter to more clearly identify qualifying tax-exempt organizations. 

* Completing a risk assessment on compliance issues related to the 
credit. The assessment identified risks involving refunds for tax-
exempt entities, difficulties verifying employment tax return 
information for certain employers, and not using existing Math Error 
Authority (MEA). 

* Considering the costs and benefits of MEA for the credit.[Footnote 
40] IRS officials identified three filters whose type of errors could 
be addressed with MEA. They noted that less than 1 percent of Forms 
8941 tripped one or more of those filters,[Footnote 41] which IRS 
officials said does not justify the costs to develop procedures to use 
MEA, if it were granted.[Footnote 42] 

Filters Check Some Eligibility Criteria, but Are Limited by Available 
Data: 

IRS developed 21 filters for Form 8941, some of which apply 
differently to SB/SE and TEGE taxpayers. The filters cover some of the 
eligibility requirements for the credit. Errors on about 3.5 percent 
(11,763) of Forms 8941 for tax year 2010 tripped 1 or more filters; 
almost half of those forms were from tax-exempt entities. According to 
IRS officials, the filter failure rate is consistent with other recent 
tax credits. 

The filters do not cover all of the credit's requirements for several 
data-related reasons.[Footnote 43] In one case, data are not included 
on Form 8941 but may be included on worksheets required to be retained 
by claimants (e.g., information on business owner family members or 
seasonal employees included in credit calculations); in another case, 
certain data are not transcribed (e.g., the credit amount for certain 
claimants). For other requirements, IRS officials stated that 
reasonable filters cannot easily be developed because of challenges 
with matching data. 

Some Form 8941 filters also face limitations mainly because of 
problems with data or IRS's systems. 

* Filters are mutually exclusive, meaning that filters on related 
requirements are viewed in isolation. However, according to IRS 
officials, IRS has ways to identify whether a form failed more than 
one filter, which IRS considers when identifying returns for potential 
examination. 

* Some filters may mistakenly target eligible claimants because the 
filters rely on general thresholds in Form 8941 data or, in some 
cases, other IRS data (such as employee-level data) that are not exact 
matches to data on the Form 8941. 

Data on Forms W-2 (employees' annual Wage and Tax Statement) could 
provide additional data for filters once the provision in PPACA is 
implemented that requires employers to report the cost--including both 
employer and employee contributions--of certain types of health 
insurance provided to an employee.[Footnote 44] IRS officials said the 
data have limited use because, among other things, they would not 
provide details for determining whether an employer met the credit's 
requirements for health insurance; therefore, IRS officials will not 
pursue using the data at this time. Nevertheless, the data could be 
used in a filter to identify claimants who reported no health 
insurance contributions on Form W-2 and therefore may not be offering 
health insurance. In the absence of other documentation or third-party 
reporting on health insurance, using Form W-2 data in a filter could 
be a cost-effective, rough indicator of whether a claimant is paying 
employee health insurance premiums, without increasing taxpayer 
burden. However, IRS provided transition relief to employers that file 
fewer than 250 Forms W-2 per year, and issued guidance stating that 
these employers will not be required to report the data until further 
guidance is issued. As a result, it is unlikely that the data could be 
useful before 2014, the year when the credit will only be available to 
employers for any 2 consecutive years. 

Examination Instructions Cover Most Eligibility Requirements, but Gaps 
Exist: 

After the filters are run, IRS creates lists of claims to consider for 
further examination. SB/SE wanted enough examination cases to spot 
check different filters and claims from different regions, to enable 
them to establish a field presence and to learn about compliance risks 
with the credit, according to an SB/SE official.[Footnote 45] 
Examination staff in SB/SE and TEGE are to follow a set of 
instructions when doing examinations.[Footnote 46] 

SB/SE's examination instructions address all of the credit's 
requirements for small businesses to claim the credit except that they 
do not include specific instructions for examiners on determining 
eligibility of claimants with non-U.S. addresses. An employer located 
outside of the United States with a business or trade interest in the 
United States may claim the credit only if the employer pays premiums 
for coverage issued in and regulated by one of the states or the 
District of Columbia. Without a prompt in examination instructions, 
IRS examiners may overlook claimants that do not comply with the 
address requirements. An SB/SE official said IRS has no instructions 
for examiners to review claimants with non-U.S. addresses during an 
examination on the credit because potential compliance problems with 
businesses with non-U.S. addresses exist for other tax credits. This, 
however, was not IRS's approach for another general business tax issue 
relevant to the credit--whether claimants that carry back the credit 
to offset tax liabilities in previous years did so properly. Near the 
end of our work, SB/SE added guidance to one of its examination 
instruction documents to cover the carry back issue. 

Instructions for TEGE examiners also address most of the eligibility 
requirements to claim the credits, but, like SB/SE's, TEGE examination 
instructions do not address how to review claimants with non-U.S. 
addresses.[Footnote 47] Further, TEGE instructions for some of the 
credit's requirements have less detail compared to SB/SE's 
instructions. TEGE's instructions provide steps on how to determine if 
an employer's insurance premiums paid met "qualifying arrangement" and 
other criteria, but they provide less detail than SB/SE instructions. 
For example, SB/SE guidance instructs examiners to review health 
insurance policies and invoices to confirm premium payments, and to 
review other documentation to check whether the employer offers health 
benefits that are not eligible for the credit. TEGE instructions do 
not suggest these steps and also do not provide a prompt for examiners 
to ensure that insurance premiums paid on behalf of seasonal employees 
are included in calculations. 

According to IRS officials, the TEGE examiners are trained 
specifically for doing examinations on the credit and therefore need 
less guidance than SB/SE examiners, who work on multiple issues 
simultaneously. However, TEGE examination documents contain detailed 
guidance in a workbook format for these trained examiners on other 
credit requirements. Without detailed guidance for TEGE examiners that 
instructs them on how to examine health insurance documents, examiners 
may not consistently identify noncompliance, which could lead to 
erroneous credit refunds. This could particularly be the case as 
examining health insurance documents to check eligibility for this new 
credit has not been typical work for these examiners. 

Examinations Under Way, but IRS Needs to Develop a Plan for 
Efficiently Analyzing Results on Credit Compliance: 

For tax year 2010, SB/SE plans to conduct over 1,500 examinations 
related to the credit, and TEGE anticipates about 1,000 examinations. 
An SB/SE official said the number of examinations is expected to 
provide initial compliance information and allow IRS to establish a 
compliance presence without committing too many resources initially. 
TEGE selected its number of examinations based on resource decisions, 
before tax year 2010 claims began. Neither SB/SE nor TEGE adjusted the 
number of examinations once actual claim numbers were known. As a 
result, the percentage of TEGE claims being examined is high, 
according to a TEGE official. Table 1 summarizes the status of IRS's 
examinations on the credit. 

Table 1: Examination Actions for Form 8941 as of February 2012, for 
Tax Year 2010: 

Number of Examinations initiated: 
SB/SE[A]: 500; 
TEGE: 570; 
Total: 1,070. 

Number of Additional examinations anticipated: 
SB/SE[A]: 1,000; 
TEGE: 430; 
Total: 1,430. 

Number of Closed examinations: 
SB/SE[A]: 119; 
TEGE: 88; 
Total: 207. 

Number of Closed examinations resulting in a change to the credit 
amount: 
SB/SE[A]: 46; 
TEGE: 22; 
Total: 68. 

Sources: SB/SE and TEGE officials. 

[A] For examinations, SB/SE does not distinguish between examinations 
on business or individual claimants. 

[End of table] 

IRS's database on examination results tracks the aggregate dollar 
amount of tax changes as a result of the examination but does not 
contain the reason a change is made. Consequently, IRS is not able to 
isolate and analyze examination results related to the credit versus 
other tax issues. This is particularly a problem for SB/SE 
examinations, which may cover issues other than the credit.[Footnote 
48] Instead, as initial examinations have closed, IRS officials said 
that management has spoken with examiners about findings related to 
the credit. This has been possible because of the relatively low 
initial volume of cases, but this approach may not be feasible as 
results accumulate. Therefore, it is not clear how IRS can efficiently 
analyze results to decide whether changes are necessary in how it 
examines the credit or how it educates small employers about how to 
comply with the credit's rules, and whether it committed too many or 
too few resources to examinations of the credit. 

Furthermore, IRS does not have criteria for deciding whether the 
resources spent on examinations of the credit are appropriate, given 
the amount of errors found. IRS officials said that for future years 
they plan to select the number of credit examinations based on past 
results, identified compliance risks, and available resources. 
However, without criteria to assess the results in concert with these 
risks and resources, IRS is less able to ensure that examination 
resources target errors with the credit, rather than examining 
compliant claimants. 

For example, early examination results (as of February 2012) show that 
67 percent of the examinations completed were closed without changing 
the credit amount. Examinations without a change burden taxpayers and 
use IRS resources. We recognize that few of the planned examinations 
have been completed and the "no change" percentage could change. 
According to IRS officials, cases resulting in "no change" tend to be 
the first cases closed because they close more quickly than cases 
requiring a change. However, IRS is not using change rate information 
from prior tax credits to determine if examinations for the credit 
have a "high" no-change rate, which could be one indicator to help 
decide how many examination resources to apply to the credit. IRS 
officials said they do not plan to use data from examinations of other 
tax provisions to benchmark measures--such as the no-change rate or 
length of time an examination is open--because results would not be 
comparable. 

A summary of examination results specific to the credit could also 
inform decisions about using additional compliance tools such as soft 
notices.[Footnote 49] In the past, IRS has used soft notices to 
correct errors and collect funds without initiating an examination. 
[Footnote 50] A senior IRS official who is implementing the credit 
said IRS has not ruled out using soft notices, but examination results 
would need to identify an issue that would justify their use. He said 
soft notices are not effective for all taxpayers or situations. He 
said IRS would consider using soft notices if officials found a series 
of returns with mistakes from the same tax preparer or promoter of tax 
schemes. Furthermore, soft notices may necessitate follow-up, which 
would negate some of the advantages of the notices. If IRS analysis 
showed that examinations were not a cost-effective way to pursue 
certain errors made in claiming a credit, a soft notice may offer 
another approach to improving compliance with lower costs to IRS and 
less burden on claimants. 

Data to Evaluate Many Questions about the Effects of the Credit Are 
Not Available: 

There are a variety of research questions that could be of interest to 
policymakers about the effects of the credit that cannot be evaluated 
with data currently available. Figure 5 shows how the credit may 
influence employer behavior and, ultimately, employees. 

Figure 5: Model of Potential Outcomes and Influential Factors for the 
Small Employer Health Insurance Tax Credit: 

[Refer to PDF for image: illustrations] 

Inputs/investment: 
* Forfeited tax revenue; 
* Implementation costs for IRS; 
* Employer costs for purchasing insurance and claiming the credit. 

Outputs—-who gets what: 
* Tax credit to certain small employers with low-wage employees that 
offer health insurance. 

Potential outcomes/impact: 
Small low wage employers claimants: 
* Begin offering health insurance, keep offering insurance or upgrade 
insurance plans; 
* Savings on insurance premiums, possibly leading to re-investment in 
the business or the business or organization.   

Employees of claimants: 
* Gain or maintain access to employer-sponsored health insurance; 
* Lower out-of-pocket costs for health care because of employer's 
ability to upgrade insurance plans; 
* Increased wages because of employers saving on insurance premiums 
     
Potential influential factors: 
* General economic conditions; 
* Labor market/unemployment; 
* Effect of PPACA provisions on the insurance market, including 
exchanges; 
* Other regulatory or tax policies affecting small employers; 
* Changes in eligibility requirements for the credit; 
* Politics. 
 
Sources: GAO analysis and University of Wisconsin Extension Program 
Development and Evaluation model.      

Note: Basic model structure is based on University of Wisconsin 
Extension Program Development and Evaluation model, as shown in GAO-12-
208G. Content and relationships among variables are based on GAO 
analysis of interviews with subject matter specialists, and literature 
review. 

[End of figure] 

To answer research questions about the credits potential outcomes 
shown in figure 5, the following are examples of data that might be 
needed: 

* number of small, low-wage employers offering health insurance, 
before and after the credit was available; 

* number of employees at small, low-wage employers, who have or could 
obtain health insurance through their employers; and: 

* amount of annual health insurance premium costs for small, low-wage 
employers before and after the credit. 

None of these data are readily available or free of limitations, which 
complicates an evaluation. For example, the available data on employer-
sponsored health insurance do not align with the credit's eligibility 
criteria, according to our interviews with subject matter specialists 
and our review of the data (see appendix VI for a summary of the data 
sources), nor could we identify a data source that tracks when, and 
why, employers begin offering insurance. As a result of the 
limitations with all three types of data, it would be difficult to 
precisely measure changes in health insurance availability, offering, 
and costs because of the credit, without collecting additional data. 
Isolating influential factors--such as those shown in figure 5--that 
may contribute to the effects of the credit would also be a challenge 
in an evaluation.[Footnote 51] 

IRS officials said they will not collect data on credit claimants, 
outside of those collected on Form 8941. IRS's position on data 
collection for all provisions of the tax code is that it only collects 
data it needs to ensure compliance with the tax laws.[Footnote 52] 

Collecting additional data needed for policy evaluation would have 
costs, and the magnitude of those costs would depend on the type and 
amount of data needed, which depends on the research questions being 
asked. An additional consideration in thinking about the benefits and 
costs of additional data collection for policy evaluation purposes is 
the time limits on claiming the credit. The current version of the 
credit runs through the end of 2014.[Footnote 53] Policymakers' 
conclusions about the questions to be answered by any evaluations of 
the credit's effects would determine the type of data that would need 
to be collected. 

Conclusions: 

The Small Employer Health Insurance Tax Credit was intended to offer 
an incentive for small, low-wage employers to provide health 
insurance. However, utilization of the credit has been lower than 
expected, with the available evidence suggesting that the design of 
the credit is a large part of the reason why. While the credit could 
be redesigned, such changes come with trade-offs. Changing the credit 
to expand eligibility or make it more generous would increase the 
revenue loss to the federal government. 

In administering the credit to ensure compliance, IRS employed a 
number of practices that were shown effective for other tax provisions 
or are consistent with IRS strategic objectives. Nevertheless, we 
identified several opportunities for IRS to either improve compliance 
or perhaps reduce the resources it is devoting to ensuring compliance. 
Without additional guidance for examiners on employers with non-U.S. 
addresses, there is a risk of improper credit claims being allowed. 
Without more systematic attention to early examination results, IRS 
could lock itself into devoting more scarce resources than needed to 
examinations. 

Recommendations for Executive Action: 

To help ensure thoroughness and consistency of examinations on the 
credit, we recommend that the Commissioner of Internal Revenue take 
the following two actions: 

1. Revise the SB/SE and TEGE examination instructions to include 
instructions for examiners on how to confirm eligibility for the 
credit for small employers with non-U.S. addresses. 

2. Revise the TEGE examination guidance to include more detailed 
instructions for examiners on how to confirm that claimants properly 
calculated eligible health insurance premiums paid for purposes of the 
credit. The SB/SE examination instructions could serve as a model. 

To help ensure that IRS uses its examination resources efficiently, we 
recommend that the Commissioner of Internal Revenue take the following 
two actions: 

3. Document and analyze the results of examinations involving the 
credit to identify how much of those results are related to the credit 
versus other tax issues being examined, what errors are being made in 
claiming the credit, and when the examinations of the credit are worth 
the resource investment. 

4. Related to the above analysis of examination results on the credit, 
identify the types of errors with the credit that could be addressed 
with alternative approaches, such as soft notices. 

Agency Comments and Our Evaluation: 

In an April 30, 2012, letter responding to a draft of this report 
(which is reprinted in appendix VII), the IRS Deputy Commissioner for 
Services and Enforcement provided comments on our findings and 
recommendations as well as information on additional agency efforts 
related to implementing the Small Employer Health Insurance Tax Credit 
in PPACA. IRS generally agreed with all four of our recommendations. 
Regarding our recommendation on examination instructions related to 
small employers with non-U.S. addresses, IRS stated that SB/SE will 
provide additional guidance in its instructions and that TEGE has 
added guidance to its instructions. On May 1, 2012, IRS provided a 
copy of the TEGE instructions, which we are reviewing. On our 
recommendation on revising TEGE's examination guidance, IRS's letter 
said that on April 13, 2012, TEGE implemented more detailed 
instructions in its examination guidance related to confirming proper 
calculations of eligible health insurance premiums paid for purposes 
of the credit. These instructions were also included in the TEGE 
document provided on May 1, 2012. 

With regard to analyzing credit examination results to identify 
compliance issues specific to the credit, IRS said it regularly 
analyzes audit results to determine whether resources are expended 
efficiently, though its information systems do not currently capture 
adjustments by issue, such as this tax credit. IRS agreed to leverage 
existing information systems and, as appropriate, to allocate 
resources to manually analyze examination results. IRS said this will 
include, as feasible, identifying the types and amounts of errors 
related to the credit. We reiterate the benefit of documenting and 
analyzing the results of examinations involving the credit. If it does 
not do so, IRS will not have information for determining whether 
examinations of the credit are worth the resource investment. 

Regarding our fourth recommendation on using examination results to 
determine whether alternative compliance approaches, such as soft 
notices, could help address errors with the credit, IRS agreed to 
continue to review its compliance efforts to determine whether soft 
notices would be appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
Chairmen and Ranking Members of other Senate and House committees and 
subcommittees that have appropriation, authorization, and oversight 
responsibilities for IRS. We will also send copies to the Commissioner 
of Internal Revenue, the Secretary of the Treasury, the Chairman of 
the IRS Oversight Board, and the Director of the Office of Management 
and Budget. In addition, the report will be available at no charge on 
the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions or about this report, please 
contact me at (202) 512-9110 or at whitej@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix VIII. 

Signed by: 

James R. White: 
Director, Tax Issues: 
Strategic Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

To assess the extent to which the Small Employer Health Insurance Tax 
Credit (referred to in this report as the credit) is being claimed, we 
obtained and analyzed Internal Revenue Service (IRS) data on the 
claims on Form 8941 for tax year 2010. We interviewed responsible IRS 
staff and examined background materials. IRS provided a report from 
the Form 8941 data and we reviewed the programming code that created 
that report. We corroborated the results of this IRS report with a 
Treasury Inspector General for Tax Administration (TIGTA) report 
published in November and found similarities.[Footnote 54] The data 
were found to be sufficiently reliable for our purposes. We identified 
estimates of employers that were potentially eligible to claim the 
credit by reviewing reports and websites of government agencies, think 
tanks, and interest groups. When possible, we interviewed officials 
from the government agencies and business groups that developed 
estimates. 

To identify any factors limiting credit claims, we interviewed groups 
representing employers, tax preparers and insurance brokers and to 
assess how these factors could be addressed, we analyzed our interview 
results as well as relevant documents. Specifically, we spoke with 
representatives of the National Federation of Independent Businesses, 
the National Council of Nonprofits, the Small Business Majority, the 
U.S. Chamber of Commerce, the American Institute of Certified Public 
Accountants, America's Health Insurance Plans, the National Society of 
Accountants, the National Association of Enrolled Agents, and the 
National Association of Health Underwriters. We worked with some of 
these groups to assemble discussion groups with tax preparers, health 
insurance brokers, and employers to discuss potential factors and ways 
to address them. Discussion groups were, for the most part, telephone 
conferences. We also spoke with insurance and tax preparation 
companies, specifically, BlueCross Blue Shield of Kansas City, 
Independent Health of New York, H&R Block's Tax Institute, and Jackson 
Hewitt Tax Service. We used qualitative analysis software to do a 
content analysis of the interviews and discussion group comments. 

To provide additional support for discussion group and interview 
findings we reviewed documents and, where possible, we identified data 
from IRS, the 2010 Medical Expenditure Panel Survey, or the 2011 
Kaiser Family Foundation Health Benefits Survey. At IRS, we 
interviewed officials from the Small Business/Self-Employed Division 
(SB/SE), including officials in the Communications and Liaison Office; 
the Tax Exempt and Government Entities Division (TEGE); the Research 
and Analysis for Tax Administration division, and the Taxpayer 
Advocacy Service. 

To assess how fully IRS is ensuring that the tax credit is correctly 
claimed by eligible employers, we reviewed IRS's compliance plan and 
filters and instructions for IRS staff conducting examinations, and 
compared these documents with compliance practices used for prior tax 
provisions and found in IRS strategic objectives.[Footnote 55] We also 
highlighted any gaps between filters and examination instructions and 
the credit's eligibility rules. We reviewed the filter results for tax 
year 2010 claims and interviewed SB/SE and TEGE officials about 
compliance efforts. 

To assess what would be needed to evaluate the effects of credit, we 
conducted a literature review and interviewed representatives of the 
forenamed groups and subject matter specialists from government, 
academia, research foundations and think tanks. We selected the 
specialists based primarily on our literature review and spoke with 
individuals at the University of Massachusetts, Boston; Massachusetts 
Institute of Technology; the Commonwealth Fund; the Urban Institute; 
the Kaiser Family Foundation; the American Enterprise Institute; the 
Employee Benefit Research Institute; the RAND Corporation; the Small 
Business Administration Office of Advocacy; and the Office of Tax 
Policy at the Department of the Treasury. We reviewed available data 
in commonly cited surveys with questions on employer health insurance, 
and identified how the questions and variables match to the 
eligibility criteria for the credit. 

We conducted this performance audit from July 2011 through May 2012 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: State Average Premiums for Small Group Markets for 2010 
and 2011: 

The Small Employer Health Insurance Tax Credit is based on a 
percentage of the lesser of (1) the premiums paid by the eligible 
small employer for employees during the taxable year and (2) the 
amount of premiums the employer would have paid if each employee were 
enrolled in a plan with a premium equal to the average premium for the 
small group market in the state (or in an area in the state) in which 
the employer is offering health insurance. The Secretary of Health and 
Human Services determines whether separate average premiums will apply 
for areas within a state and also determines the average premium for a 
state or substate area. Table 2 shows the average premiums for the 
small group market in each state for tax years 2010 and 2011. 

Table 2: State Average Premiums for Small Group Markets for 2010 and 
2011: 

Alabama; 
2010: Employee only (single plan): $4,441; 
2010: Family plan: $11,275; 
2011: Employee only (single plan): $4,778; 
2011: Family plan: $12,084. 

Alaska; 
2010: Employee only (single plan): $6,204; 
2010: Family plan: $13,723; 
2011: Employee only (single plan): $6,729; 
2011: Family plan: $14,701. 

Arizona; 
2010: Employee only (single plan): $4,495; 
2010: Family plan: $10,239; 
2011: Employee only (single plan): $4,614; 
2011: Family plan: $11,063. 

Arkansas; 
2010: Employee only (single plan): $4,329; 
2010: Family plan: $9,677; 
2011: Employee only (single plan): $4,378; 
2011: Family plan: $9,849. 

California; 
2010: Employee only (single plan): $4,628; 
2010: Family plan: $10,957; 
2011: Employee only (single plan): $4,790; 
2011: Family plan: $11,493. 

Colorado; 
2010: Employee only (single plan): $4,972; 
2010: Family plan: $11,437; 
2011: Employee only (single plan): $5,007; 
2011: Family plan: $12,258. 

Connecticut; 
2010: Employee only (single plan): $5,419; 
2010: Family plan: $13,484; 
2011: Employee only (single plan): $5,640; 
2011: Family plan: $14,096. 

Delaware; 
2010: Employee only (single plan): $5,602; 
2010: Family plan: $12,513; 
2011: Employee only (single plan): $5,902; 
2011: Family plan: $13,411. 

District of Columbia; 
2010: Employee only (single plan): $5,355; 
2010: Family plan: $12,823; 
2011: Employee only (single plan): $5,721; 
2011: Family plan: $14,024. 

Florida; 
2010: Employee only (single plan): $5,161; 
2010: Family plan: $12,453; 
2011: Employee only (single plan): $5,218; 
2011: Family plan: $12,550. 

Georgia; 
2010: Employee only (single plan): $4,612; 
2010: Family plan: $10,598; 
2011: Employee only (single plan): $5,085; 
2011: Family plan: $11,440. 

Hawaii; 
2010: Employee only (single plan): $4,228; 
2010: Family plan: $10,508; 
2011: Employee only (single plan): $4,622; 
2011: Family plan: $11,529. 

Idaho; 
2010: Employee only (single plan): $4,215; 
2010: Family plan: $9,365; 
2011: Employee only (single plan): $4,379; 
2011: Family plan: $10,066. 

Illinois; 
2010: Employee only (single plan): $5,198; 
2010: Family plan: $12,309; 
2011: Employee only (single plan): $5,565; 
2011: Family plan: $13,176. 

Indiana; 
2010: Employee only (single plan): $4,775; 
2010: Family plan: $11,222; 
2011: Employee only (single plan): $5,262; 
2011: Family plan: $12,097. 

Iowa; 
2010: Employee only (single plan): $4,652; 
2010: Family plan: $10,503; 
2011: Employee only (single plan): $4,694; 
2011: Family plan: $11,051. 

Kansas; 
2010: Employee only (single plan): $4,603; 
2010: Family plan: $11,462; 
2011: Employee only (single plan): $4,693; 
2011: Family plan: $11,909. 

Kentucky; 
2010: Employee only (single plan): $4,287; 
2010: Family plan: $10,434; 
2011: Employee only (single plan): $4,456; 
2011: Family plan: $10,560. 

Louisiana; 
2010: Employee only (single plan): $4,829; 
2010: Family plan: $11,074; 
2011: Employee only (single plan): $5,143; 
2011: Family plan: $11,911. 

Maine; 
2010: Employee only (single plan): $5,215; 
2010: Family plan: $11,887; 
2011: Employee only (single plan): $5,261; 
2011: Family plan: $12,255. 

Maryland; 
2010: Employee only (single plan): $4,837; 
2010: Family plan: $11,939; 
2011: Employee only (single plan): $5,073; 
2011: Family plan: $12,530. 

Massachusetts; 
2010: $Employee only (single plan): $5,700; 
2010: $Family plan: $14,138; 
2011: $Employee only (single plan): $5,900; 
2011: $Family plan: $15,262. 

Michigan; 
2010: $Employee only (single plan): $5,098; 
2010: $Family plan: $12,364; 
2011: $Employee only (single plan): $5,195; 
2011: $Family plan: $12,539. 

Minnesota; 
2010: $Employee only (single plan): $4,704; 
2010: $Family plan: $11,938; 
2011: $Employee only (single plan): $5,048; 
2011: $Family plan: $12,790. 

Mississippi; 
2010: $Employee only (single plan): $4,533; 
2010: $Family plan: $10,501; 
2011: $Employee only (single plan): $4,787; 
2011: $Family plan: $10,860. 

Missouri; 
2010: $Employee only (single plan): $4,663; 
2010: $Family plan: $10,681; 
2011: $Employee only (single plan): $4,843; 
2011: $Family plan: $11,379. 

Montana; 
2010: $Employee only (single plan): $4,772; 
2010: $Family plan: $10,212; 
2011: $Employee only (single plan): $4,923; 
2011: $Family plan: $10,789. 

Nebraska; 
2010: $Employee only (single plan): $4,715; 
2010: $Family plan: $11,169; 
2011: $Employee only (single plan): $5,130; 
2011: $Family plan: $12,057. 

Nevada; 
2010: $Employee only (single plan): $4,553; 
2010: $Family plan: $10,297; 
2011: $Employee only (single plan): $4,781; 
2011: $Family plan: $10,836. 

New Hampshire; 
2010: $Employee only (single plan): $5,519; 
2010: $Family plan: $13,624; 
2011: $Employee only (single plan): $5,858; 
2011: $Family plan: $14,523. 

New Jersey; 
2010: $Employee only (single plan): $5,607; 
2010: $Family plan: $13,521; 
2011: $Employee only (single plan): $5,868; 
2011: $Family plan: $14,093. 

New Mexico; 
2010: $Employee only (single plan): $4,754; 
2010: $Family plan: $11,404; 
2011: $Employee only (single plan): $5,146; 
2011: $Family plan: $12,328. 

New York; 
2010: $Employee only (single plan): $5,442; 
2010: $Family plan: $12,867; 
2011: $Employee only (single plan): $5,589; 
2011: $Family plan: $13,631. 

North Carolina; 
2010: $Employee only (single plan): $4,920; 
2010: $Family plan: $11,583; 
2011: $Employee only (single plan): $5,136; 
2011: $Family plan: $11,949. 

North Dakota; 
2010: $Employee only (single plan): $4,469; 
2010: $Family plan: $10,506; 
2011: $Employee only (single plan): $4,545; 
2011: $Family plan: $11,328. 

Ohio; 
2010: $Employee only (single plan): $4,667; 
2010: $Family plan: $11,293; 
2011: $Employee only (single plan): $4,706; 
2011: $Family plan: $11,627. 

Oklahoma; 
2010: $Employee only (single plan): $4,838; 
2010: $Family plan: $11,002; 
2011: $Employee only (single plan): $4,922; 
2011: $Family plan: $11,200. 

Oregon; 
2010: $Employee only (single plan): $4,681; 
2010: $Family plan: $10,890; 
2011: $Employee only (single plan): $4,881; 
2011: $Family plan: $11,536. 

Pennsylvania; 
2010: $Employee only (single plan): $5,039; 
2010: $Family plan: $12,471; 
2011: $Employee only (single plan): $5,186; 
2011: $Family plan: $12,671. 

Rhode Island; 
2010: $Employee only (single plan): $5,887; 
2010: $Family plan: $13,786; 
2011: $Employee only (single plan): $5,956; 
2011: $Family plan: $14,553. 

South Carolina; 
2010: $Employee only (single plan): $4,899; 
2010: $Family plan: $11,780; 
2011: $Employee only (single plan): $5,036; 
2011: $Family plan: $11,780. 

South Dakota; 
2010: $Employee only (single plan): $4,497; 
2010: $Family plan: $11,483; 
2011: $Employee only (single plan): $4,733; 
2011: $Family plan: $11,589. 

Tennessee; 
2010: $Employee only (single plan): $4,611; 
2010: $Family plan: $10,369; 
2011: $Employee only (single plan): $4,744; 
2011: $Family plan: $11,035. 

Texas; 
2010: $Employee only (single plan): $5,140; 
2010: $Family plan: $11,972; 
2011: $Employee only (single plan): $5,172; 
2011: $Family plan: $12,432. 

Utah; 
2010: $Employee only (single plan): $4,238; 
2010: $Family plan: $10,935; 
2011: $Employee only (single plan): $4,532; 
2011: $Family plan: $11,346. 

Vermont; 
2010: $Employee only (single plan): $5,244; 
2010: $Family plan: $11,748; 
2011: $Employee only (single plan): $5,426; 
2011: $Family plan: $12,505. 

Virginia; 
2010: $Employee only (single plan): $4,890; 
2010: $Family plan: $11,338; 
2011: $Employee only (single plan): $5,060; 
2011: $Family plan: $12,213. 

Washington; 
2010: $Employee only (single plan): $4,543; 
2010: $Family plan: $10,725; 
2011: $Employee only (single plan): $4,776; 
2011: $Family plan: $11,151. 

West Virginia; 
2010: $Employee only (single plan): $4,986; 
2010: $Family plan: $11,611; 
2011: $Employee only (single plan): $5,356; 
2011: $Family plan: $12,724. 

Wisconsin; 
2010: $Employee only (single plan): $5,222; 
2010: $Family plan: $12,819; 
2011: $Employee only (single plan): $5,284; 
2011: $Family plan: $13,911. 

Wyoming; 
2010: $Employee only (single plan): $5,266; 
2010: $Family plan: $12,163; 
2011: $Employee only (single plan): $5,430; 
2011: $Family plan: $12,867. 

Source: Department of Health and Human Services and IRS information. 

[End of table] 

[End of section] 

Appendix III: Adjustments in Counting Total Small Employer Claims and 
Total Credit Amount Claims for Tax Year 2010: 

Internal Revenue Service (IRS) data for tax year 2010 show 335,600 
total claims filed. This total must be adjusted to avoid counting the 
110,800 S corporation and partnership claims that were passed through 
to 165,300 respective shareholders and partners who then filed their 
claims separately. Excluding the 165,300 shareholder and partner 
claims filed leaves 170,300 small employer claims filed. To capture 
the number of credit amounts claimed and avoid the amounts that were 
claimed by the S corporations and partnerships as well as their 
respective shareholders and partners, we excluded the 110,800 S 
corporation and partnership claims to arrive at 224,800 credit amounts 
claimed. (See figure 6.) 

Figure 6: Number of Credit Claims by Taxpayer Type, Tax Year 2010: 

[Refer to PDF for image: illustration] 

Total number of claims/Forms 8941 filed: 335,600: 

Employer claims: 170,300: 
* C corps and other (estates, trusts etc.) claims: 24,100; 
* Sole proprietor claims: 22,500[A]; 
* Nonprofit claims: 12,900; 
* S corps and  partnership claims: 110,800. 
[Claims pass through to shareholders and partners] 

Shareholder/Partner claims: 165,300. 

Total claims excluding S corp and partnership claims:
335,600 - 110,800 = 224,800. 

Source: GAO analysis of IRS data. 

Note: Numbers rounded to the nearest hundred. 

[A] Also included in this group are single member owners of 
disregarded limited liability corporations. 

[End of figure] 

[End of section] 

Appendix IV: Credit Claims by Employer Size and Wages Paid, Tax Year 
2010: 

[Refer to PDF: vertical bar graph] 

Number of employer claims: 

Average annual wages paid by claiming employers: $25,000 or less; 
10 or fewer FTEs: 28,131; 
11 to 25 FTEs: 5,994. 

Average annual wages paid by claiming employers: Greater than $25,000 
to $30,000; 
10 or fewer FTEs: 21,699; 
11 to 25 FTEs: 5,353. 

Average annual wages paid by claiming employers: Greater than $30,000 
to $35,000; 
10 or fewer FTEs: 27,090; 
11 to 25 FTEs: 6,183. 

Average annual wages paid by claiming employers: Greater than $35,000 
to $40,000; 
10 or fewer FTEs: 28,193; 
11 to 25 FTEs: 5,446. 

Average annual wages paid by claiming employers: Greater than $40,000 
to $45,000; 
10 or fewer FTEs: 24,342; 
11 to 25 FTEs: 3,042. 

Average annual wages paid by claiming employers: Greater than $45,000 
to $50,000; 
10 or fewer FTEs: 14,140; 
11 to 25 FTEs: 724. 

Source: GAO analysis of IRS data. 

[End of figure] 

[End of section] 

Appendix V: Form 8941 and Worksheets for Claiming the Small Employer 
Health Insurance Tax Credit: 

This appendix contains the noninteractive Form 8941 and worksheets, 
shown in figure 4 in the letter. 

Form 8941 Credit for Small Employer Health Insurance Premiums: 
OMB No. 1545-2198. 

Department of the Treasury: 
Internal Revenue Service: 
See separate instructions.    

1. Enter the number of individuals you employed during the tax year 
who are considered employees for purposes of this credit (see 
instructions): 

2. Enter the number of full-time equivalent employees you had for the 
tax year (see instructions). If you entered 25 or more, skip lines 3 
through 11 and enter -0- on line 12. 

3. Average annual wages you paid for the tax year (see instructions). 
If you entered $50,000 or more, skip lines 4 through 11 and enter -0- 
on line 12. 

4. Premiums you paid during the tax year for employees included on 
line 1 for health insurance coverage under a qualifying arrangement 
(see instructions). 

5. Premiums you would have entered on line 4 if the total premium for 
each employee equaled the average premium for the small group market 
in which you offered health insurance coverage (see instructions). 
     
6. Enter the smaller of line 4 or line 5. 

7. Multiply line 6 by the applicable percentage: 
* Tax-exempt small employers, multiply line 6 by 25% (.25); 
* All other small employers, multiply line 6 by 35% (.35). 

8. If line 2 is 10 or less, enter the amount from line 7. Otherwise, 
see instructions. 

9. If line 3 is $25,000 or less, enter the amount from line 8. 
Otherwise, see instructions. 

10. Enter the total amount of any state premium subsidies paid and any 
state tax credits available to you for premiums included on line 4 
(see instructions). 

11. Subtract line 10 from line 4. If zero or less, enter -0-. 

12. Enter the smaller of line 9 or line 11. 

13. If line 12 is zero, skip lines 13 and 14 and go to line 15. 
Otherwise, enter the number of employees included on line 1 for whom 
you paid premiums during the tax year for health insurance coverage 
under a qualifying arrangement (see instructions). 

14. Enter the number of full-time equivalent employees you would have 
entered on line 2 if you only included employees included on line 13. 

15. Credit for small employer health insurance premiums from 
partnerships, S corporations, cooperatives, estates, and trusts (see 
instructions). 

16. Add lines 12 and 15. Partnerships and S corporations, stop here 
and report this amount on Schedule K; all others, go to line 17. 

17. Credit for small employer health insurance premiums included on 
line 16 from passive activities (see instructions). 

18. Subtract line 17 from line 16. 

19. Credit for small employer health insurance premiums allowed for 
2010 from a passive activity (see instructions). 

20. Carryback of the credit for small employer health insurance 
premiums from 2011. 

21. Add lines 18 through 20. Cooperatives, estates, and trusts, go to 
line 22. Tax-exempt small employers, skip lines 22 and 23 and go to 
line 24. All others, stop here and report this amount on Form 3800, 
line 29h. 

22. Amount allocated to patrons of the cooperative or beneficiaries of 
the estate or trust (see instructions). 

23 Cooperatives, estates, and trusts, subtract line 22 from line 21. 
Stop here and report this amount on Form 3800, line 29h. 

24 Enter the amount you paid in 2010 for taxes considered payroll 
taxes for purposes of this credit (see instructions). 

25 Tax-exempt small employers, enter the smaller of line 21 or line 24 
here and on Form 990-T, line 44f. 

[End of form] 

Worksheet 1. Information Needed To Complete Line 1 and Worksheets 2 
and 3: 

If you need more rows, use a separate sheet and include the additional 
amounts in the totals below. 

(a) Individuals Considered Employees:   

(b) Employee Hours of Service:  

(c) Employee Wages Paid: 

Totals: 

Worksheet 2. Full-Time Equivalent Employees (FTEs): 

1. Enter the total employee hours of service from Worksheet 1, column 
(b): 
2. Hours of service per FTE: 2,080. 

3. Full-time equivalent employees. Divide line 1 by line 2. If the 
result is not a whole number (0, 1, 2, etc.), generally round the 
result down to the next lowest whole number. However, if the result is 
less than one, enter 1. Report this amount on Form 8941, line 2: 

Worksheet 3. Average Annual Wages: 

1. Enter the total employee wages paid from Worksheet 1, column (c): 

2. Enter FTEs from Worksheet 2, line 3: 

3. Average annual wages. Divide line 1 by line 2. If the result is not 
a multiple of $1,000 ($1,000, $2,000, $3,000, etc.), round the result 
down to the next lowest multiple of $1,000. Report this amount on Form 
8941, line 3. 

Worksheet 4. Information Needed To Complete Lines 4 and 5 and 
Worksheet 7: 

If you need more rows, use a separate sheet and include the additional 
amounts in the totals below. 

(a) Enrolled Individuals Considered Employees: 

(b) Employer Premiums Paid:  

(c) Employer State Average Premiums:   

(d) Enrolled Employee Hours of Service: 

Totals: 

Worksheet 5. FTE Limitation: 

1. Enter the amount from Form 8941, line 7: 

2. Enter the amount from Form 8941, line 2: 

3. Subtract 10 from line 2: 

4. Divide line 3 by 15. Enter the result as a decimal (rounded to 
at least 3 places): 

5. Multiply line 1 by line 4: 

6. Subtract line 5 from line 1. Report this amount on Form 8941, line 
8: 

Worksheet 6. Average Annual Wage Limitation: 

1. Enter the amount from Form 8941, line 8: 

2. Enter the amount from Form 8941, line 7: 

3. Enter the amount from Form 8941, line 3: 

4. Subtract $25,000 from line 3: 

5. Divide line 4 by $25,000. Enter the result as a decimal (rounded 
to at least 3 places: 

6. Multiply line 2 by line 5: 

7. Subtract line 6 from line 1. Report this amount on Form 8941, line 
9: 

Worksheet 7. FTEs Enrolled in Coverage: 

1. Enter the total enrolled employee hours of service from Worksheet 
4, column (d): 

2. Hours of service per FTE: 2,080: 

3. Divide line 1 by line 2. If the result is not a whole number (0, 1, 
2, etc.), generally round the result down to the next lowest whole 
number. However, if the result is less than one, enter 1. Report this 
amount on Form 8941, line 14: 

Source: IRS. 

[End of section] 

Appendix VI: Publicly Available Data on Small Employer Health 
Insurance: 

Through our literature review and interviews, we identified several 
commonly cited non-Internal Revenue Service data sources on employer 
health insurance. Each source has different variables related to the 
key eligibility requirements for the Small Employer Health Insurance 
Tax Credit. Table 3 summarizes each source, its basic methodology, and 
whether its data matches with these requirements for the credit. The 
table only considers data that are readily accessible in public-use 
data sets. 

Table 3: Publicly Available Data on Small Employer Health Insurance: 

Sources and methodology: 

Organizations responsible for the survey: 
Employer Health Benefits Survey: Kaiser Family Foundation and Health 
Research and Educational Trust; 
Medical Expenditure Panel Survey (Insurance Component): Department of 
Health and Human Services, Agency for Healthcare Research and Quality; 
National Compensation Survey: Bureau of Labor Statistics. 

Frequency and contact method: 
Employer Health Benefits Survey: Annual, conducted by phone; 
Medical Expenditure Panel Survey (Insurance Component): Annual, 
generally conducted by phone or mail; 
National Compensation Survey: Annual, conducted by personal visits, 
mail, telephone, and e-mail. 

Unit of analysis, sample size and source: 
Employer Health Benefits Survey: Employers--2,088 from Dun and 
Bradstreet and the Census of Governments; 
Medical Expenditure Panel Survey (Insurance Component): Employers[A] --
38,409 private sector establishments from U.S. Census Bureau's 
Business Register; 
National Compensation Survey: Employers;[B] 15,566 private industry 
establishments from state unemployment insurance reports. 

Response rate and most recent data, as of April 2012:
Employer Health Benefits Survey: Forth-seven percent in 2011; 
Medical Expenditure Panel Survey (Insurance Component): Eighty-three 
percent for private establishments in 2010; 
National Compensation Survey: Fifty-six percent for private industry 
in 2011. 

Key eligibility requirement for the credit, and whether the source 
contains data: 

Employer is a for-profit or tax-exempt entity: 
Employer Health Benefits Survey: Yes; 
Medical Expenditure Panel Survey (Insurance Component): Yes; 
National Compensation Survey: Yes[C]. 

Employer offers health insurance and pays at least 50 percent of 
premiums: 
Employer Health Benefits Survey: Yes; 
Medical Expenditure Panel Survey (Insurance Component): Yes; 
National Compensation Survey: Yes. 

Employer has fewer than 25 full-time equivalents (FTE): 
Employer Health Benefits Survey: No--number of employees; 
Medical Expenditure Panel Survey (Insurance Component): No--number of 
employees; 
National Compensation Survey: No--number of employees, from 1 to 49, 
and number of full-and part-time employees. 

Average annual wages are less than $50,000 per FTE: 
Employer Health Benefits Survey: No--percentage of full-time employees 
who make $23,000 or less per year; 
Medical Expenditure Panel Survey (Insurance Component): No--percentage 
of employees who earned wages in one of three categories[D]; 
National Compensation Survey: No--wages are presented in five 
percentiles[E]. 

Source: GAO analysis of data sources. 

[A] The Medical Expenditure Panel Survey's Insurance Component sample 
is drawn at the establishment level; an establishment is a particular 
workplace or location. 

[B] The National Compensation Survey sample is drawn at the 
establishment level; an establishment is a single economic unit that 
engages in one, or primarily one, type of economic activity. It is 
usually a single physical location. 

[C] Statistical models used by the National Compensation Survey are 
able to control for profit/non-profit status. 

[D] The annual wage categories are about (1) $23,920 or less, 
(2)$23,920 to $54,080, and (3) $54,080 or more. 

[E] Wage data are presented in percentile categories in the published 
data. The annual wage categories, for private industry workers, are 
about: (1) 10th percentile makes $17,160 or less, (2) 25th percentile 
makes $22,235 or less, (3) 50th percentile makes $33,009 or less, (4) 
75th percentile makes $51,605 or less, and (5) the 90th percentile 
makes $78,811 or less. 

[End of table] 

[End of section] 

Appendix VII: Comments from the Internal Revenue Service: 

Department of The Treasury: 
Deputy Commissioner: 
Internal Revenue Service: 
Washington, D.C. 20224: 

April 30, 2012: 

Mr. James R. White: 
Director, Tax Issues: 
Strategic Issues Team: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. White: 

Thank you for the opportunity to review your draft report entitled, 
"Small Employer Health Tax Credit: Factors Contributing to Low Use and 
Complexity (GAO-12-549, Job Code 450922). As your report notes, the 
IRS conducted significant outreach to ensure that eligible small 
businesses are aware of the credit, and have the information that they 
need to claim it. 

With respect to your specific recommendations, the IRS agrees that 
more detailed instructions to examiners and more detailed data about 
examination results would be helpful improvements to our program. The 
enclosed response addresses each recommendation separately. 

If you have questions, please contact me, or a member of your staff 
may contact Fads Fink, Commissioner, Small Business/Self-Employed 
Division at (202) 622-0600. 

Sincerely, 

Signed by: 

Steven T. Miller: 
Deputy Commissioner for Services and Enforcement: 

Enclosure: 

[End of letter] 

Enclosure: 

GAO Recommendations and IRS Responses to GAO Draft Report Small 
Employer Health Tax Credit: Factors Contributing to Low Use and 
Complexity GA0-12-549: 

Recommendation: Revise the SB/SE and TEGE examination instructions to 
include instructions for examiners on how to confirm eligibility for 
the credit for small employers with a non-U.S. address. 

Comments: We agree with this recommendation. Although a foreign 
address does not necessarily reflect ineligibility for the credit, we 
agree that when a foreign address is listed, the examiner should take 
special care to ensure that the requirements for the credit are 
satisfied. SB/SE instructions and a current job aide explain that 
eligibility for the credit requires that health care premiums are paid 
to a U.S. regulated insurance carrier and that the credit is applied 
to a U.S. federal tax liability. SB/SE will supplement existing 
guidance to highlight this area and provide additional information for 
auditing this issue. TEGE has also developed and implemented 
additional examination instructions for examiners on how to confirm 
eligibility for the credit for small employers with a non-U.S. 
address. These additional instructions for examiners are based upon 
published guidance. 

Recommendation: Revise the TEGE examination guidance to include more 
detailed instructions for examiners on how to confirm that claimants 
properly calculated eligible health insurance premiums paid, for 
purposes of the credit. The SB/SE examination instructions could serve 
as a model. 

Comments: We agree with this recommendation. TEGE has revised its 
written examination guidance to include more detailed instructions for 
examiners on how to confirm that claimants properly calculated 
eligible health insurance premiums paid, for purposes of the credit. 
These revisions were based upon SB/SE examination instructions and 
were implemented on April 13, 2012. 

Recommendation: Document and analyze the results of examinations 
involving the credit to identify how much of those results are related 
to the credit versus other tax issues being examined, what errors are 
being made in claiming the credit, and when the examinations of the 
credit are worth the resource investment. 

Comments: We agree with this recommendation. We regularly analyze 
audit results to determine whether resources are being expended 
efficiently. Currently, our information systems do not capture 
adjustments by issue. However, we will leverage existing information 
systems and, as appropriate, allocate resources to manually analyze 
examination results to optimize our compliance efforts. This will 
include, as feasible, identifying what errors taxpayers are making in 
claiming the credit and how much of the examination results relate to 
the tax credit as opposed to other tax issues. 

Recommendation: Related to the above analysis of examination results 
on the credit, identify the types of errors with the credit that could 
be addressed with alternative approaches, such as soft notices. 

Comments: As noted above, the Service continuously strives to improve 
its compliance efforts. It uses all tools at its disposal-—including 
soft notices-—to promote compliance with the least burden to the 
taxpayer and the Service. We will continue to review our compliance 
efforts to determine whether the use of soft notices would be 
appropriate. 

[End of section] 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. White, (202) 512-9110 or whitej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Thomas Short, Assistant 
Director; Susan Baker; Amy Bowser; Ellen Grady; George Guttman; Donna 
Miller, Ruben Montes de Oca, Edward Nannenhorn; Robert Gebhart; 
Crystal Robinson; Cynthia Saunders; and Lindsay Swenson made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] MEPS is a set of large-scale surveys. MEPS is administered by the 
Agency for Healthcare Research and Quality in the Department of Health 
and Human Services. The 2010 Insurance Component survey had a response 
rate of about 83 percent for private establishments, and 38,409 
respondents, including for-profit, and nonprofit employers; government 
units are excluded from these statistics. 

[2] Pub. L. No. 111-148, §§ 1421, 10105, 124 Stat. 119 (Mar. 23, 
2010), (codified at 26 U.S.C. § 45R). 

[3] CBO, letter to the Honorable Nancy Pelosi, Speaker of the U.S. 
House of Representatives (Washington, D.C.: Mar. 18, 2010). 

[4] For example, see GAO, Tax Refunds: Enhanced Prerefund Compliance 
Checks Could Yield Significant Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-11-691T] (Washington, D.C.: May 25, 
2011). 

[5] For additional description of challenges for small employers 
providing coverage, see GAO, Private Health Insurance: Small Employers 
Continue to Face Challenges in Providing Coverage, [hyperlink, 
http://www.gao.gov/products/GAO-02-8] (Washington, D.C.: Oct. 31, 
2001). 

[6] In general, the federal minimum wage is $7.25 per hour. Many 
states also have minimum wage laws and minimum wages vary from state 
to state. 

[7] See Quantria Strategies/Small Business Administration, Health 
Insurance in the Small Business Market: Availability, Coverage, and 
the Effect of Tax Incentives (Cheverly, Md.: September 2011). 

[8] CBO estimated that for firms with 25 or fewer employees, 26 
percent of premiums goes toward insurers' administration costs, 
compared with 7 percent for firms with at least 1,000 employees; see 
CBO, Key Issues in Analyzing Major Health Insurance Proposals 
(Washington, D.C.: December 2008). 

[9] Risk pooling spreads risk across a group; a larger pool stabilizes 
the average insurance costs. Smaller risk pools raise costs because 
insurers run the risk of insuring those with relatively high health 
care needs. As a result, insurers may increase premiums to better 
ensure that they can cover unexpectedly large health care costs. 

[10] The average deductible in 2010 per employee enrolled in a single 
(employee only) health insurance plan was $1,421 for employers with 
fewer than 10 employees; $1,420 for employers with 10 to 24 employees, 
$1,513 for employers with 25 to 99 employees, $1,155 for employers 
with 100 to 999 employees, and $738 for employers with 1,000 or more 
employees, according to MEPS. A deductible is the amount of expenses 
that must be paid out-of-pocket before an insurer will pay any 
expenses. 

[11] For purposes of this credit, a business includes those that are 
corporations in a controlled group of corporations, or members of an 
affiliated service group, as well as partnerships, sole 
proprietorships, cooperatives and trusts. A sole proprietor is an 
individual who owns an unincorporated business but may employ others. 

[12] The credit is available to tax-exempt employers described in 26 
U.S.C. § 501(c) and exempt from tax under 26 U.S.C. § 501 (a). 

[13] To calculate FTEs, the total hours of service must be determined 
for all individuals considered employees. There are a number of 
methods that can be used to determine the hours worked, but the hours 
are limited to 2,080 per employee. The total number of hours of 
service is divided by 2,080 to arrive at the FTE number. 

[14] Other exclusions are seasonal employees, unless they work for the 
employer on more than 120 days in the tax year, and ministers who are 
deemed to be self-employed.Leased employees are included in FTE 
calculations. 

[15] Wages for the employees included in the FTE calculations are 
included in average wage calculations except for minister's wages 
which are not subject to Social Security or Medicare tax. 

[16] IRS offered a transition rule on the "qualifying arrangement" 
criteria for tax year 2010 and for satisfying the uniformity 
requirement. IRS Notice 2010-44. 

[17] The unused credit for small businesses may be carried back 1 year 
or forward up to 20 years. Credits cannot be carried back to a year 
prior to the effective date of the credit; any unused credit amounts 
for 2010 can only be carried forward. See IRS Notice 2010-44. 

[18] Owners of S corporations are referred to as shareholders. S 
corporations are corporations that "pass through" gains and losses to 
shareholders' individual tax returns without generally paying taxes at 
the entity level. Similarly, partners receive pass through income and 
losses from a partnership. 

[19] For partners and shareholders, the credit is to be entered on the 
Schedule K-1 to be filed with an income tax return. 

[20] PPACA requires the establishment of exchanges in each state by 
January 1, 2014, which are to help eligible individuals and small 
employers compare and select insurance coverage from among 
participating health plans. See Pub. L. No. 111-148, § 1311(b), 124 
Stat. 119, 173 (Mar. 23, 2010). 

[21] The number of employees who had their premiums paid by employers 
that claimed the credit was about 770,000. 

[22] The Council of Economic Advisors is an agency within the 
Executive Office of the President charged with offering objective 
advice on the formulation of domestic and international economic 
policy, and SBA is a government agency that offers a variety of 
programs and support services to help small businesses. 

[23] The estimate for SBM and SBA included nonprofits. The estimate 
for NFIB was only for small businesses; it is not known whether the 
estimate for the Council of Economic Advisors included nonprofits in 
addition to businesses. 

[24] CBO and JCT recently reduced their original estimates of the 
future costs of the credit to a cost of $1 billion in 2012 and a cost 
of $21 billion from 2012 to 2021. These estimates were previously $5 
billion in 2012 and $40 billion from 2012 to 2021. 

[25] See appendix IV for a graph of claimants with fewer than 10 FTEs 
and the amount of full credits. 

[26] A small group plan is a health coverage plan sponsored by small 
employers for the employees. 

[27] This MEPS statistic is based on employers--both profit and 
nonprofit--with fewer than 10 employees that pay annual wages of 
$24,000 or less to over half of their employees. 

[28] This MEPS statistic is based on employers--both profit and 
nonprofit--with 10 to 25 employees that pay annual wages of $24,000 or 
less to over half of their employees. Because the employers eligible 
for the partial credit can pay up to $50,000 in wages, this is a less 
precise estimate than using MEPS to estimate insurance offerings for 
the full credit. 

[29] The National Society of Accountants conducted a survey in 2008 
that estimated the hourly tax preparer fee to be $122 an hour. Tax 
preparers may not necessarily charge for the credit, according to some 
discussion group participants. 

[30] The Taxpayer Advocate Service is an independent organization 
within the IRS that helps taxpayers who are experiencing economic 
harm; are seeking help in resolving problems with IRS; and believe an 
IRS system or procedure is not working as it should. 

[31] The NFIB Research Foundation is a nonprofit affiliated with NFIB. 

[32] NFIB conducted this survey in April and May 2011 of 750 small 
employers of firms with 50 or fewer employees. The Kaiser Family 
Foundation conducted its survey from January through May 2011 of 3,184 
public and private firms with 3 or more employees and its questions 
about the credit were directed to employers with 50 or fewer employees. 

[33] Each focus group in 2011 consisted of 12 tax preparers. IRS 
issued a report on the focus groups' results on October 14, 2011. 

[34] Given the previously discussed lack of knowledge or awareness, it 
is not clear that increasing outreach would increase credit usage. 

[35] Three bills were recently introduced to amend the small employer 
health insurance credit to increase the maximum number of FTEs to 50, 
modify the phase out of the credit amount, and repeal the limitation 
based on state health insurance premium averages. H.R. 4324, Small 
Business Employee Health Insurance Credit Expansion Act of 2012, also 
would repeal the 2-year limit after 2014, making the credit available 
indefinitely. H.R.4252 and S.2227, both titled Small Business Health 
Care Tax Credit Improvement Act of 2012, propose to increase allowable 
average annual salaries paid to employees to $28,500 to claim the full 
credit. 

[36] Using the number of employees instead of FTEs would require an 
increase in the number of eligible employees in order to reach the 
same population of small employers. For example, two part-time 
employees working 20 hours per week count as one FTE, making the 
employer appear larger than if FTEs were counted. 

[37] We found that IRS's compliance plans for the TETR were consistent 
with good management practices in previous reports. See GAO, Tax 
Administration: Telephone Excise Tax Refund Requests Are Fewer Than 
Projected and Have Had Minimal Impact on IRS Services, [hyperlink, 
http://www.gao.gov/products/GAO-07-695] (Washington, D.C.: Apr. 11, 
2007). 

[38] We tested IRS's internal controls for the COBRA unemployment 
subsidies in the American Recovery and Reinvestment Act and found that 
IRS was able to identify all five fictitious companies used to 
fraudulently apply for the subsidies. See GAO Proactive Testing of 
ARRA Tax Credits for COBRA Premium Payments, [hyperlink, 
http://www.gao.gov/products/GAO-10-804R] (Washington, D.C.: June 14, 
2010). 

[39] See GAO, Tax Gap: Complexity and Taxpayer Compliance, [hyperlink, 
http://www.gao.gov/products/GAO-11-747T] (Washington, D.C.: June 28, 
2011). 

[40] The Internal Revenue Code provides IRS with MEA to assess 
additional tax or otherwise correct tax return errors in limited 
circumstances when an adjustment is the result of mathematical or 
clerical errors on the return. In these cases, IRS can avoid costly 
audits and IRS is not required to provide taxpayers a right to appeal 
MEA assessments, although they may file a claim to ask IRS to reduce 
the assessment if they believe IRS erred. See 26 U.S.C. § 6213(b). 
Over the years, Congress has granted MEA for specific purposes and 
those purposes are listed in section 6213(g)(2). 

[41] These three IRS filters are to check whether credit claims are 
consistent with eligibility requirements subject to computation 
criteria. 

[42] We previously recommended that Congress should consider 
broadening IRS's ability to use MEA, with appropriate safeguards 
against misuse. See GAO, Recovery Act: IRS Quickly Implemented Tax 
Provisions, but Reporting and Enforcement Improvements Are Needed, 
[hyperlink, http://www.gao.gov/products/GAO-10-349] (Washington, D.C.: 
Feb. 10, 2010). 

[43] We do not describe the filters and the eligibility requirements 
not being covered in detail because of concerns about revealing IRS's 
compliance approach and criteria. 

[44] See 26 U.S.C. § 6051(a)(14), which generally requires employers 
to report the aggregate cost of employer-sponsored coverage they 
provide for an employee on Form W-2. 

[45] TEGE established two mandatory filters that if failed, 
automatically trigger an exam; only 16 forms tripped these two 
filters, as of December 31, 2011. 

[46] Examiner instructions consist of several types of documents, such 
as worksheets and checklists on the credit's eligibility requirements; 
we also refer to these documents as examination "guidance." 

[47] Tax-exempt entities with non-U.S. addresses must pay health 
insurance premiums for an employee's coverage issued in and regulated 
in one of the states or the District of Columbia. 

[48] TEGE examinations will only cover the credit, according to IRS 
officials. 

[49] A soft notice is a letter generated to taxpayers that IRS has 
identified possible errors on the taxpayer's form. The goal is to 
increase compliance at minimal costs by educating taxpayers for future 
compliance without doing an examination and minimizing the taxpayers' 
need to respond to the notice. 

[50] For example, see GAO, Advance Earned Income Tax Credit: Low Use 
and Small Dollars Paid Impede IRS's Efforts to Reduce High 
Noncompliance, [hyperlink, http://www.gao.gov/products/GAO-07-1110] 
(Washington, D.C.: Aug. 10, 2007), and Tax Gap: IRS Could Do More to 
Promote Compliance by Third Parties with Miscellaneous Income 
Reporting Requirements, [hyperlink, 
http://www.gao.gov/products/GAO-09-238] (Washington, D.C.: Jan. 28, 
2009). 

[51] For details on methods for identifying causation, including 
experiments and quasi-experiments, using comparison groups, see GAO, 
Designing Evaluations: 2012 Revision, [hyperlink, 
http://www.gao.gov/products/GAO-12-208G] (Washington, D.C.: January 
2012). These designs are not feasible for the credit because it was 
implemented simultaneously across the country. 

[52] See GAO, Government Performance and Accountability: Tax 
Expenditures Represent a Substantial Federal Commitment and Need to Be 
Reexamined, [hyperlink, http://www.gao.gov/products/GAO-05-690] 
(Washington, D.C.: Sept. 23, 2005). 

[53] Starting in 2014, eligible small employers can claim the credit 
for the 2 consecutive years beginning when the employer first offers 
employee health insurance from a state exchange. 

[54] TIGTA, Affordable Care Act: Efforts to Implement the Small 
Business Health Care Tax Credit Were Mostly Successful, but Some 
Improvements Are Needed, 2011-40-103 (Washington, D.C.: Sept. 19, 
2011). 

[55] For example, see GAO, Tax Refunds: Enhanced Prerefund Compliance 
Checks Could Yield Significant Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-11-691T] (Washington, D.C.: May 25, 
2011). 

[End of section] 

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