It was only in January that the IRS began issuing penalty notices for the 2021 tax year. Now, a mere four months later, the tax agency has already started assessing penalty notices for 2022, namely Letter 5699.
We have previously communicated that the IRS is becoming more efficient in identifying and assessing instances of ACA non-compliance, but the speed at which the agency is operating now is unprecedented.
What does the IRS’ greater efficiency in identifying ACA Employer Mandate non-compliance mean for your business? And, first and foremost, how should you go about responding to a Letter 5699 if you receive one?
Understanding Letter 5699
Officially known as the “Missing Information Return Form 1094/1095-C,” Letter 5699 is a notification to entities identified by the IRS as potential Applicable Large Employers (ALEs) for a specific reporting year, that did not submit the required annual ACA filings of Forms 1094-C and 1095-C.
Based on IRS records, these organizations were obligated to file information returns, but the tax agency has no documentation of them fulfilling the requirement.
It’s worth noting that failing to file ACA filings does not always mean the tax agency will issue a Letter 5699.
This preliminary measure is occasional and serves as a warning to entities that failed to comply with the requirements of the ACA’s Employer Mandate. Letter 5699s are typically followed by actual penalty amounts, which can range into the millions of dollars.
What Prompts Letter 5699?
The ACA’s Employer Mandate requires ALEs, which are organizations with at least 50 full-time and full-time equivalent employees to offer 95% of their full-time workforce affordable Minimum Essential Coverage and meets Minimum Value.
This information is documented in the annual 1094-C and 1095-C filings that must be submitted. And failing to satisfy this responsibility can result in the IRS issuing Letter 5699.
Besides allowing organizations additional time to submit their forms without facing penalties, Letter 5699 provides organizations with the opportunity to correct any mistakes linked to the 1094-C and 1095-C filings for the relevant tax year.
While a Letter 5699 notice may seem like bad news, the reality is that the notice is a blessing in disguise. The reason? Because there’s no actual penalty fee associated with it.
Receiving such a notice should be appreciated by organizations since the IRS doesn’t always issue it before proceeding with penalty assessments.
Prepare for What Comes After Letter 5699
Failing to submit the required Forms 1094-C and 1095-C to the IRS can lead to various penalties, including Letter 5005-A and Letter 972CG.
For the 2024 tax year, the IRS may assess a $630 per employee filing penalty to organizations that fail to file their ACA information altogether. So, if you ignore Letter 5699, know that a steep penalty may be following closely behind.
Take for example an ALE that has 500 full-time employees. Intentional disregard of the required ACA filings can result in a penalty of $315,000.
How to Respond to Letter 5699
If you receive a Letter 5699, it’s important to review it carefully. Consider the options the notice provides you with for why ACA submissions were not filed for the applicable tax year. The options provided in the 2022 Letter 5699 notices include:
- I was an ALE for calendar year 2022 and already filed Form 1094-C and Forms 1095-C with the IRS using the following name and employer identification number (EIN) on this date.
- I was an ALE for calendar year 2022 and have included my Form 1094-C and Forms 1095-C with this letter.
- I was not an ALE for calendar year 2022. Explain reasons below under “Other.”
- Had an alternative reason for not filing
If you’re unsure about how to respond to Letter 5699, consult a reliable ACA compliance vendor, such as Trusaic, which has a proven track record. We will get to the bottom of why your mandated 1094-C and 1095-C filings weren’t completed and assist you in a response.
Maneuvering Greater IRS Efficiency
It’s no secret that the Internal Revenue Service received an influx of resources over the last several years, including $80 billion in funding and 87,000 new agents.
The recent developments of how quickly the IRS is identifying and assessing instances of ACA non-compliance are impressive and a clear indicator that the agency is putting the additional resources to work.
Some other things to watch out for now that the IRS is operating at greater speed include how the agency is assessing non-compliance. A new client of ours recently approached us regarding a Letter 226J notice they received which requested that they provide proof of ACA full-time calculations.
Best practices for navigating these developments include managing compliance with the ACA’s Employer Mandate proactively. That means monthly monitoring, a strict ACA documentation process, and a systematic method for calculating affordability each month.
With Trusaic’s ACA Complete, your organization can offload the responsibilities of ACA compliance and focus on addressing more pressing issues. We’ve helped our clients prevent over $1 billion in penalty assessments.
