The IRS recently announced that a little more than 228,000 taxpayers had claimed the Small Business Health Care Tax Credit for tax year 2010. As of Mid-May, these taxpayers received a total amount of more than $278 million. This amount is significantly lower than the estimated Credit for tax year 2010 of $2 billion. Why is the difference between the estimate and actual so large?

The Treasury Inspector General for Tax Administration (TIGTA) audited the plan to determine if the IRS “adequately implemented and accurately processed the Credit”. TIGTA found that the Credit was “mostly successful, but some improvements are needed”. TIGTA reports that the IRS did timely complete the actions related to the Credit and put more of the responsibility on the taxpayers making mistakes on the form used to request the Credit (Form 8941). I do not agree with their assessment of the discrepancy.

I believe the problem is that the Credit was over-estimated due to the Full-Time Employee and the Average Annual Wage restrictions. Most small employers that provide health insurance provide them to full time employees, and most of those full time employees, at least here in Colorado, make more than $25,000 per year. What we found with our clients was that only about a third of them could claim some part of the Credit, and of them only one could claim the full Credit. The third that could take a portion of the Credit had to decide if the Credit was more than what they would have to pay their tax accountant to claim it. If the IRS and TIGTA want to know what they can do to get more small business to claim the Credit, then they need to look at and change the Full-Time Employee and Average Annual Wage restrictions.