Expect Greater Scrutiny and Audits from IRS Staff on ACA Compliance
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The IRS staff is preparing a new round of IRC 4980H penalty assessments to be issued to employers for failing to comply with the requirements of the Affordable Care Act.
The agency is in the process of issuing new Letters 226J for the 2017 tax year. Letter 226J is the penalty notice issued by the IRS to those employers the tax agency believes have failed to comply with the ACA’s Employer Mandate. This mandate requires all employers with 50 or more full-time employees and full-time equivalent employees, to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to IRS 4980H penalties. These employers are considered to be Applicable Large Employers, or ALEs.
Employers who received these Letter 226J penalty assessments for the 2015 and 2016 tax years found an IRS staff that was receptive to reasonable arguments as to why the ACA non-compliance occurred. In some instances, staff let penalty assessments slide if the ACA compliance failure was based on a paperwork error, such as failing to check a box. Some compliance issues were dismissed because of misunderstandings of safe harbor provisions or other basic provisions of the law.
That is going to change.
Going forward, expect IRS staff to begin scrutinizing the methodology and data underlying employers’ determination of full-time employees in ACA filings for the 2017 tax year, which is a deeper level of review than may have been undertaken for previous tax years. This will mean a deeper examination by IRS staff as they audit full-time and part-time employee counts provided by employers in their annual ACA submissions. IRS staff also is expected to request companies provide the support information to explain how they derived these full-time employee counts to prove their accuracy. Inaccurately providing full-time employee counts has been a trigger for ACA penalties.
Over the past few years, employers using do-it-yourself software and payroll companies have relied on them to submit accurate information to the IRS by identified deadlines. In some cases, the software and payroll companies thought they submitted the information electronically to the IRS, not realizing the submissions were never accepted. They never confirmed whether they received the submission acceptance notices to prove that the ACA information returns had been received by the IRS. Now, many employers are realizing that the IRS never received their submissions and, as a result, are being issued ACA penalty notices. Expect IRS staff to insist that employers obtain submission acceptance notices to prove they filed with the IRS as they mount a defense to have ACA penalty notices dismissed.
The IRS also is cracking down on individuals who have received Premium Tax Credits (PTCs) to offset health insurance purchased through government exchanges. The IRS is asking individual taxpayers to obtain documents from their employers to prove that they are entitled to their PTCs, placing additional paperwork burdens on HR teams.
In addition to Letter 226J, the IRS is expected to become more aggressive in issuing penalty assessments associated with IRC 6721/6722. These penalty assessments are issued using Letter 5005-A with Form 866-A. They are sent to ALEs that failed to furnish 1095-C forms to employees under IRC 6721/6722 or file forms 1094-C and 1095-C with the IRS for the 2017 tax year. These notices focus on the failure of ALEs to distribute 1095-C forms to employees and to file 1094-C and 1095-C forms with the federal tax agency by required deadlines. IRS staff believes that many employers have not made ACA filings for the 2015, 2016 and 2017 tax years.
The IRS is issuing a preliminary Letter 5699 to those ALEs the IRS believes should have been filing ACA information annually with the tax agency. In this notice, the IRS asks employers to confirm the name the ALE used when filing its ACA information, provide the Employer Identification Number (EIN) submitted, and the date the filing was made. It appears that the agency is determining if penalty assessments are warranted for certain employers by cross referencing the number of W-2s employers filed with the IRS with their 1094-C and 1095-C forms. If this information is not consistent, it will lead to the IRS issuing the ALE a penalty notice. Replying to Letter 5699 is crucial if you have already filed information with the IRS because the information your organization provided should have prevented your organization from receiving an ACA penalty notice. Failure to respond will result in the Letter 5005-A with Form 866-A.
With so much at stake, employers should consider undertaking an ACA Penalty Risk Assessment to learn if they will be deemed ALEs and are at risk of receiving ACA penalties from the IRS. Some outside experts may offer to undertake this assessment at no cost to employers. Such a review can reap dividends by helping organizations avoid significant IRS ACA penalties.
It’s also a good time to review your organization’s ACA paperwork to ensure it is organized and readily available in case you receive an ACA penalty notice. This is more important than ever with the IRS limiting the amount of time organizations have to respond to penalty notices. For instance, employers that receive IRS Letter 226J penalty notice for failing to comply with the ACA will be limited to one 30-day extension for each IRS notice received in the penalty process. That means employers need to act with even more urgency as the window for responding to the penalty assessment will be shorter due to this new enforcement policy.
If you are an employer that should be filing ACA-related information with the IRS and have not complied, you should immediately seek assistance to submit filings for the 2015, 2016 and 2017 tax years to mitigate your organization’s potential financial exposure.
To learn more about ACA compliance for the 2019 tax year, click here.
For ACA reporting deadlines in 2020 for the 2019 tax year, organizations should review this link for important dates and requirements.
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