The Internal Revenue Service should conduct a compliance initiative project to determine if employers are claiming individual COBRA subsidies for longer than 15 months, and if individuals are properly receiving COBRA, the General Accounting Office says.

If significant noncompliance is found, the IRS should issue “soft notices” to all employers reminding them of COBRA eligibility requirements and urging them to correct errors that may have been made, GAO recommends.

The GAO report describes the status of the IRS implementation of tax provisions under the American Recovery and Reinvestment Act, including IRS efforts to determine potential abuse of the provisions, and discusses possible lessons learned for future tax administration.

The COBRA subsidy under ARRA originally provided a 65 percent health insurance subsidy for up to 9 months for individuals who lost health insurance coverage due to involuntary termination between September 1, 2008, and December 31, 2009 (now extended to February 28, 2010). Former employers pay 65 percent of insurance premium costs and are reimbursed through a tax credit against their payroll tax liability or through a tax refund if the credit exceeds their payroll tax liability.

The GAO says that IRS information on COBRA premium assistance claims will understate the total number of individuals receiving health insurance. GAO explains that employers are instructed to list the number of individuals provided COBRA premium assistance on Form 941 for 2009, “Employer’s Quarterly Federal Tax Return,” but the number entered on the form is only the total number of former employees receiving COBRA coverage and does not include their dependents who may be covered under the same insurance plan. For example, if COBRA premium assistance was paid for an insurance plan that covered a former employee and his or her spouse and child, an employer would count that as one person provided COBRA premium assistance on Form 941, not three, GAO says.

According to IRS officials, the form did not include dependents due to the short time frame for implementation, space constraints on the form, and a desire not to overburden employers with additional reporting requirements. As of December 26, 2009, IRS had received approximately 192,000 returns from employers claiming about $803 million in COBRA credits.