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In late 2018, the IRS began issuing ACA penalties under IRC 6721/6722 to employers that failed to distribute 1095-C forms to employees and to file 1094-C and 1095-C forms with the federal tax agency by required deadlines for the 2015 and 2016 tax years. The penalties are being issued to employers using Letter 5005-A/Form 886-A. Some of the penalties are in the millions of dollars. By the year 2026, the IRS is expected to issue more than $228 billion in penalty assessments for ACA non-compliance.
Organizations that receive penalties under IRC 6721/6722 should take the following steps:
Respond to the penalty notice: These penalties are extremely time sensitive. One day can make the difference in your penalty assessments. For the 2018 tax year, intentionally disregarding the IRS filing requirements can result in an effective penalty of $1,080 per return ($540 per failure with respect to distributing to employees, and $540 per failure with respect to filing with the IRS).
Check your records for Letter 5699: Prior to issuing penalties to employers identified as having failed to file their ACA returns with the IRS, the federal agency typically issues Letter 5699 to employers that it believes are ALEs that failed to file information returns. This IRS notice asks employers to confirm the name they used when filing ACA information, provide the Employer Identification Number (EIN) submitted, and the date the filing was made. Employers will need to have their ACA filings receipt ID on hand to prove they complied with their ACA requirements and filed their ACA returns on time.
Supporting Documentation: Organizations subject to penalties under IRC 6721/6722 will need documentation and lots of it. To prove that a good-faith effort was made in the event Taxpayer Identification Number (TIN) errors are identified, employers should document outreach attempts made to correct and validate employee information. If penalties are assessed for failure to file with the IRS or furnish 1095-C forms to employees, employers will need receipt IDs, time stamped returns, as well as legitimate reasons for why deadlines were not met.
Make sure the IRS confirms your response to the penalty assessment: Following your response to the penalty notice, the IRS will assess whether the amount of the proposed penalty should be adjusted. Following the agency’s review, further instruction will be provided to your organization unless the matter is identified as closed. Be sure to respond timely to any additional information requests.
A third-party can represent your ALE in responding to 6721/6722 penalties: Your organization may be represented by an internal resource or a qualified third-party in this penalty review process. The IRS ACA penalty process allows for an ALE to assign a representative to represent it before the IRS. That third-party should be familiar with the ACA filing process and IRS forms 1094-C and 1095-C. The representative should have expertise around the ACA employee benefits process, allowing for quick and accurate diagnosis and remediation of errors that occurred.
Similar guidelines apply for ACA penalties being issued to employers identified as having failed to comply with the ACA’s Employer Mandate. Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), employers with 50 or more full-time employees and full-time equivalent employees, are required 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 IRC 4980H penalties. The IRS started issuing 4980H penalties in November 2017 using Letter 226J.
IRS staff indicates it is preparing another round of Letter 226J penalty notices to be issued to employers the tax agency believes has failed to comply with the ACA in the 2016 tax year. And get ready for penalty notices for the 2017 tax year. IRS staff is now gathering the information to start issuing ACA penalty notices for the 2017 tax year. Those Letter 226J penalty notices for 2017 are expected to arrive sometime in the fourth quarter of 2019.
