IRS Extension of Good Faith Relief is Good and Bad News
As the saying goes, I have some good news and some bad news.
For the good news, the IRS has extended good faith relief for information-reporting requirements for the Affordable Care Act (ACA) in the 2017 tax year.
For the bad news, that good faith relief will have no impact on whether or not your organization will receive a Letter 226J IRS tax penalty notice in 2018.
The good faith relief being extended to the 2017 tax year is recognizing the ongoing challenges involved in developing procedures and systems to accurately collect and report information in compliance with ACA reporting requirements. In the third year of reporting, organizations are still struggling to get their ACA reporting processes right and this extension of good faith relief recognizes that fact.
The basis for this good faith relief is found in the preambles to IRS section 6055 and 6056 regulations provided transition relief from penalties under sections 6721 and 6722 to reporting entities that could show that they made good-faith efforts to comply with the information-reporting requirements for 2015. Notice 2016-70 extended this relief for the information-reporting requirements under sections 6055 and 6056 for 2016. Notice 2018-6 extends it for 2017.
The good faith relief applies to incorrect or incomplete information reported on forms 1094-C and 1095-C filed with the IRS or 1095-C statements of healthcare coverage that are provide to employees. This includes errors, such as missing and inaccurate taxpayer identification numbers and dates of birth, as well as other required information.
The IRS said this good faith relief is extended for the 2017 tax year only. It does not expect to offer good faith relief for reporting for the 2018 tax year.
Now for more bad news. The good faith relief does not apply to organizations that are either ignoring or are not trying to comply with ACA regulations, which includes failing to file an ACA information return with the IRS or furnish a statement to employees by IRS deadlines. For updated IRS deadlines and information on penalties that can be levied by the IRS, click here.
There continues to be a misunderstanding about how the recent tax reform legislation impacts the requirement for organizations with 50 or more full-time or full-time equivalent employees to offer affordable healthcare coverage, referred to as Applicable Large Employers (ALEs). The answer is simple. It doesn’t.
The tax reform legislation’s inclusion of a provision to zero out penalties for the individual mandate in the ACA may provide relief to individuals who do not want to be required to purchase health insurance, starting in 2019. However, like the good faith relief from reporting errors, the zeroing out of the individual mandate has no impact on an ALE’s requirement under the ACA to either offer health coverage that is “affordable” and that provides “minimum value” to their full-time employees (and offer coverage to the full-time employees’ dependents), or potentially make an employer shared responsibility payment (ESRP).
For instance, the recent IRS Letter 226J tax penalty notices issued this year are related to ESRPs for the 2015 tax year. Those tax penalty notices have been in the millions of dollars for some organizations. If the penalty is correctly assessed based on the ALE’s failure to offer affordable, minimum value healthcare coverage, the good-faith transition relief will not help.
For an infographic on how to respond to Letter 226J penalty notices, click here.
IRS penalty review process for the ACA will be ongoing and will include the 2016 tax year and future tax years. Expect that for future tax years, the IRS may be even more demanding of information to explain why your organization failed to comply with the ACA.
While it’s nice to have the IRS offer good-faith relief, don’t view it as a panacea. The best way to avoid penalties from the IRS is to comply with the ACA.
To learn more about ACA compliance in 2020, click here.
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