Is your business ready to face increased government scrutiny of Affordable Care Act (ACA) Employer Mandate compliance? A recent surge in resources targeting tax evaders and ACA enforcement means that businesses need to do their due diligence related to their tax obligations—particularly the Employer Mandate compliance.
The Internal Revenue Service (IRS) has received a significant infusion of cash, totaling $80 billion over the next decade. The funding is part of the Inflation Reduction Act passed by Congress in August 2022. The funding is designed to bolster the IRS’s enforcement capabilities, focusing on targeting wealthier tax evaders. With these increased resources, the IRS is stepping up efforts to collect an estimated $600 billion in taxes that goes unpaid each year. These unpaid taxes are particularly from affluent individuals who under-report their income.
Increased Enforcement Resources
The federal government anticipates—or at least hopes—that increased tax collection will more than offset the $80 billion price tag used for increased enforcement.
“The Congressional Budget Office estimates that the $80 billion will result in an increase in federal revenue of over $180 billion in the decade ahead, and the IRS predicts this figure is likely to be even greater,” write Nathan W. Giesselman, Christopher P. Murphy and Ginetta Sagan in a memorandum for law firm Skadden, Arps, Slate, Meagher and Flom, LLP. “As a result, we anticipate that there will be an increase in enforcement efforts, both for taxpayers currently under constant audit and those who are not.”
IRS Levy Power
Businesses certainly don’t want to end up on the wrong side of the IRS, which can not only issue a variety of ACA-related penalties but also has substantial power to enforce those penalties.
The IRS has the authority to seize property and assets to settle tax debts. This includes taking money from financial accounts and seizing and selling vehicles, real estate, and personal belongings. Currently, the IRS is using this power to collect outstanding penalties under Letter 972CG. This penalty is imposed on employers that filed their ACA information after the specified IRS deadlines in IRC Section 6721. If you recently failed to file your 2022 ACA returns, you may face a late penalty.
Aside from late penalties, the IRS can also use levies for penalties related to Letter 5005-A and Letter 226J. Letter 5005-A is sent to employers that didn’t file ACA Forms 1094-C and 1095-C with the IRS, or didn’t provide Form 1095-C to their employees as required by IRC Sections 6721 and 6722.
To avoid these penalties, employers should be aware that the IRS may send a warning notice, Letter 5699, to check if they have met their ACA information filing and distribution requirements. Letter 226J is issued to employers that have not complied with the ACA Employer Mandate. It’s essential for business owners to stay up-to-date with their ACA reporting and requirements to avoid potential levies and penalties.
Preparing for Additional Scrutiny
Understandably, enforcement efforts will target high incomes individuals and those with more complicated tax situations. This is where the IRS expects to get the greatest return on investment for its heightened enforcement activities.
“At a minimum, corporations, partnerships and high-income individuals who are under constant audit should expect larger audit examination teams as well as investigation of more issues,” recommend Giesselman, Murphy, and Sagan. “For larger corporations, partnerships and high-income individuals that have not yet been audited, or are not under constant audit, we anticipate a greater likelihood of being selected for audit due to an increase in IRS staff and technology flagging potential issues.”
What to Do if You Receive a 226J Letter
If an organization fails to meet its Employer Mandate compliance obligations and has at least one employee who obtained a Premium Tax Credit from a state or federal health exchange, it could receive an ACA penalty letter 226J from the IRS.
This is a potentially serious compliance issue for any organization, one that requires prompt and careful consideration and action. We recommend that employers:
- Review the Notice: Confirm that the notice is intended for your business, contains no errors, and is not outdated.
- Compare Notes: Review your employee data, 1094-C/1095-C filings, offers of coverage, summary of benefits, and other related healthcare details.
- Request an Extension: If you don’t have the resources to respond appropriately to the ACA penalty assessment, request an extension as soon as possible.
- Promptly Respond to the Notice: Develop your response to the ACA penalty assessment. If you disagree with the assessment, you will need to provide supporting documentation.
- Keep Track of Your Efforts: Document your communications with the IRS. The IRS encourages keeping tax information for at least three years.
With increased resources dedicated to IRS enforcement of Employer Mandate compliance, covered employers must be extra diligent. Employers need to ensure their organizations remain in compliance with a complicated and dynamic set of rules. Even unintentional tax evaders could face heavy scrutiny and steep ACA penalties if they fall under the IRS’s newly beefed-up microscope.
To gain invaluable insights on penalty amounts, affordability percentages, filing deadlines, expert tips for responding to penalty notices, and proven strategies for minimizing IRS penalty risk, download the ACA 101 Toolkit.