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The IRS imposes penalties for late filing of Forms 1094-C and 1095-C or for late furnishing of Forms 1095-C under Internal Revenue Code (IRC) Sections 6721 and 6722. These penalties can be huge depending on the number of late Forms 1095-C, at a rate of $270 per form for failure to file and an additional $270 per form for failure to furnish for the 2019 tax year.
Although the IRS does allow for waiver of these penalties, such waiver is limited to “reasonable cause” and not due to willful neglect. This standard to establish “Reasonable Cause” is limited to three ways, each of which is outlined in IRC Rule § 301.6724-1.
First, Reasonable Cause can be shown if the failure arose from “events beyond the filer’s control” and the filer acted in a “responsible manner” both before and after a late filing. (See IRC Rule § 301.6724-1(a)(2) and (d).) For example, if the filer relied upon another person required to provide information necessary for the filer to comply with the information reporting requirements (“Other Person”), say a vendor contractually obligated to file the Forms 1095-C but that vendor failed to so, then the filer must demonstrate that either of the following scenarios occurred: (1) that the failure resulted from the failure of the Other Person to provide information to the filer, or (2) that the failure resulted from incorrect information provided by the Other Person upon which information the filer relied in good faith. Moreover, whether the filer acted in a “responsible manner” requires a showing, both before and after the failure occurred, that the filer undertook significant steps to avoid or mitigate the failure. Acting in a responsible manner is the standard of care that a reasonably prudent person would exercise under the circumstances in the course of its business in determining its filing obligations.
Second, Reasonable Cause can be shown if there are “significant mitigating factors” with respect to the failure and the filer acted in a “responsible manner.” Significant mitigating factors are defined to include “but are not limited to” the circumstance under which, prior to the failure, the filer was never required to file the type of return in question or furnish the type of statement at issue to the failure.
Third, Reasonable Cause can be shown under the Due Diligence Safe Harbor if the filer can show that it exercised due diligence.
Notably, the “Reasonable Cause” standard is distinct from “Good Faith Transition Relief.” Such Transition Relief was originally provided to assist Applicable Large Employers (ALEs) in view of the relatively new ACA compliance reporting. Although this Relief has been extended to 2019, the Good Faith Transition Relief is not available to an employer who did not file/furnish their Forms in a timely manner. (See IRS Notice 2019-63.) Rather, the Transition Relief is available for those employers who filed/furnished on a timely basis and can show that they “made reasonable efforts to prepare for reporting the required information” to the IRS “such as gathering and transmitting the necessary data to an agent to prepare the data for submission.”
So, if you are an employer with 50 or more full-time employees (including full-time equivalents), also known as an Applicable Large Employer, and have failed to file Forms 1094-C/1095-C and/or failed to furnish Forms 1095-C to your applicable employees, the claim that you didn’t realize that you were required for file/furnish these forms is not “Reasonable Cause.” You are going to have to show much more.
The IRS means business when it comes to assessed ESRP penalties for ACA non-compliance. In addition to other collection avenues, the IRS has been sending some of the assessed penalties to private debt collection agencies.
