To help pay for President Barack Obama's health law, Congress enacted a 2.3% tax on the sale of medical devices used chiefly by doctors and hospitals, such as pacemakers and CT scan machines. Consumer items are exempted, including eyeglasses, lenses and hearing aids.
The tax took effect in January 2013. For the first six months of that year, the IRS estimated it would collect $1.2 billion from the tax. The audit said the IRS collected only $913 million—24% less than the estimate.
The tax is projected to generate $29 billion over the coming decade, so a 24% shortfall—if it were sustained—would be significant.
Companies subject to the tax are required to file quarterly tax forms with the IRS.
The IRS estimated it would receive between 9,000 and 15,600 returns for the first two quarters of 2013, the audit said. But the IRS received only 5,107 returns, suggesting that thousands of companies either don't know about the requirements or are simply ignoring them.
The IRS said in a statement that the agency is addressing the audit's recommendations, including revising tax forms to prevent future discrepancies.
As part of a written response in the audit, the IRS said it conducted extensive outreach to educate medical-device companies about the tax. The IRS also said it is working on better ways to identify companies that owe the tax.
The medical-device industry has been lobbying hard to get the tax repealed, and there has been movement in Congress. Both the House and the Senate have passed separate pieces of legislation calling for the tax to be repealed, though the Senate vote was on a nonbinding resolution.
"We've expressed concerns from the outset that the device tax is poorly conceived, applying an excise tax—usually reserved for rubber tires, alcohol and tobacco—to an extremely diverse high-technology manufacturing industry," said J.C. Scott, head of government affairs for AdvaMed, the medical-device industry's largest trade group.
AdvaMed says the tax is hurting job creation, reducing investment in medical innovation and increasing healthcare costs.
Many Democrats who support repealing the tax come from states like Minnesota, New York and California, which have a heavy presence of medical-equipment makers.
But while a majority of Congress is on record supporting repeal, there is no consensus on how to make up the lost revenue without adding to the budget deficit.
"Everything from this ill-conceived tax's structure to its implementation has been a disaster," said Sen. Orrin Hatch of Utah, the top Republican on the Senate Money Committee. "It is no surprise that 79 senators went on the record to repeal this job-killing tax."