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It is a sign of good government that agencies tasked with enforcing complex statutes increase efficiency over time. When the Patient Protection and Affordable Care Act (ACA) was signed into law on March 23, 2010, the Internal Revenue Service (IRS) was tasked with a brand new enforcement regime under the ACA’s Employer Mandate.
Despite the many difficulties involved in implementing healthcare reform, the IRS has demonstrated, year over year, that it is a federal agency capable of evolving to meet the growing challenges. In our experience, with each ACA reporting year, the IRS has shown signs of increased capacity for identifying ACA non-compliance and issuing penalties under Internal Revenue Code section 4980H. Below are three recent developments which serve as reminders to employers that the IRS is increasing efficiency as time progresses.
1. No more Good-Faith Transition Relief
The first signal that the IRS is increasing its enforcement efficiency was announced last year when employers experienced the final ACA reporting year of “Good-Faith Transition Relief.”
Good-Faith Relief was intended as transitional relief for employers who report incomplete or incorrect information on their information returns (including missing and inaccurate taxpayer-identification numbers or “TINs”). In determining whether Good-Faith Relief applies, the IRS takes into account a number of factors, including whether an employer made reasonable efforts to prepare IRS Forms 1094/1095-C for filing with the IRS and furnishing Forms 1095-C to employees and covered individuals, including the reasonable efforts to gather and transmit the necessary data and to test its ability to transmit the forms to the IRS.
ACA compliance is not an easy undertaking. It requires constant monitoring to track, prepare, furnish, file, and defend your ACA compliance. Perhaps recognizing this, the IRS announced “good-faith transition relief” in a series of Notices, including Notice 2020-76. IRS Notice 2020-76 provided for a 30-day extension for the furnishing deadline of IRS Forms 1095-C and extended “Good-Faith Relief” from penalties under IRC Sections 6721 and 6722 for the 2020 reporting year. With that good news came some bad news. The IRS explicitly stated that Good-Faith Relief would not be extended again.
Without Good-Faith Transition Relief, employers should expect the IRS to be much more exacting in its review of annual ACA information reports, such as Forms 1094-C and 1095-C.
2. No 4980H statute of limitations
The second sign that the IRS is increasing its enforcement efficiency is found in a 2020 memorandum issued by the IRS Office of Chief Counsel. In this memo, the agency signaled to employers that past reporting years are fair game for issuing 4980H penalties, even though the IRS is most recently issuing Letters 226J for 2018.
Specifically, the IRC Chief Counsel made clear that the Employer Shared Responsibility Payments (ESRP) imposed by section 4980H are not subject to a statute of limitations. The Office of the Chief Counsel cited a “myriad” of federal court cases holding that the US is “not subject to statutes of limitations in enforcing its rights unless Congress explicitly provides otherwise.” In conclusion, the Office of the Chief Counsel noted there is no statutory deadline as provided by Congress for Section 4980H.
Since the Employer Mandate went into full effect in 2015, many employers have questioned how diligent the IRS will be in enforcing penalties associated with the Employer Mandate. The absence of a statute of limitations means that employers can be on the hook indefinitely. The passing of years will not give employers reprieve.
3. Increased spotlight on IRS funding
Finally, a third, vital signal of increased IRS capabilities arose through a series of high-profile developments around IRS funding. Last week, five former Secretaries of the US Department of Treasury wrote an op-ed in the New York Times calling for billions in additional investment in IRS funding.
This funding would significantly boost IRS capabilities by providing much-needed upgrades in IRS tech and I.T. In their opinion piece, luminaries such as Timothy F. Geithner, Jacob J. Lew, Henry M. Paulson Jr., Robert E. Rubin, and Lawrence H. Summers wrote: “The president’s proposal calls for significant investment in the I.R.S., with $80 billion over a decade in primarily mandatory funding to provide multiyear resources to support necessary workforce, service and information technology advancements.
In particular, the agency’s siloed and antiquated I.T. is a major source of risk, causing server crashes and leaving the I.R.S. susceptible to cyberattacks. It is imperative that the information technology undergirding our tax system keep pace with the information technology driving our economy.”
This op-ed followed President Biden’s demand for additional IRS funding following blockbuster reporting around high earners and their federal tax returns. Further, the Treasury Inspector General for Tax Administration (TIGTA) final report from June 2020 found that IRS improvements are needed to ensure ESRPs are properly assessed.
This white-hot spotlight on IRS funding and improvements, particularly in light of hot button issues currently in the news, is another warning sign to employers that they engage in lackluster compliance efforts at their peril.
For employers interested in taking these warning signs to heart, download the 2021 ACA Essential Guide for Employers to learn what is expected of your organization and best practices for minimizing IRS penalty risk.
If your organization has received IRS Letter 226J, download our white paper on Letter 226J to learn best practices for responding to the penalty notice.