The IRS is enforcing additional ACA penalties: Are you at risk?

Written by Stacy Barrow, Chief Legal Consultant, SyncStream Solutions

What’s worse than one penalty? Mounting penalties.

As we are several years into compliance with the ACA’s employer mandate, you may have received, or are familiar with other companies receiving, a Letter 226J penalty notice from the IRS if the IRS determines that, for at least one month in the year, one or more of the employer’s full-time employees was enrolled in subsidized coverage through the Marketplace and the employer did not qualify for an affordability safe harbor (or other applicable relief pertaining to that employee). When assessing whether an employer may be subject to a shared responsibility penalty, the IRS uses an employer’s Forms 1094-C and 1095-C, as well as employees’ income tax returns. Based on this information, if the employer does not report an applicable safe harbor and the employee received subsidized coverage, then the letter will be issued.

Responding to and/or contesting a Letter 226J timely is important. Employers may follow the instructions on the form and respond to the IRS by the applicable deadline in the Letter 226J, or they may have someone respond on their behalf (a Form 2848 – Power of Attorney and Declaration of Representative – must be completed to allow someone to contact the IRS on your behalf). In either case, a Form 14764, ESRP Response, must be completed. The IRS will respond with a Letter 227, and the employer should follow any instructions in the letter to request a pre-assessment conference if it disagrees with the IRS’ response. The IRS published “Understanding your Letter 226J” to help employers understand the 226J process.

As of the summer of 2020, Letters 226J were primarily issued for the 2018 tax year; however, we expect to see Letters 226J issued for the 2019 tax year later this summer.

Letter 226J is not the only proposed penalty notice an employer may receive from the IRS, however. The IRS may also send an employer a Letter 972CG for, among other things, failing to meet employer 1094 and 1095 fulfillment and filing deadlines, or Letter 5699 for employers the IRS believes are ALEs but from whom the IRS did not receive Forms 1094-C or 1095-C.

Failure to timely file and furnish Forms 1094-C and 1095-C; Incorrect TIN; Failure to File Electronically

Employer who may have failed to timely furnish or file their Forms 1094 and 1095, who fail to electronically file the forms (required for entities filing 250+ forms), or who have incorrect or missing tax identification numbers could receive a Letter 972CG from the IRS.

Generally, the Letters 972CG issued in the summer of 2020 were for tax year 2018 reporting, though, as with the Letters 226J, we expect to begin seeing Letters 972CG issued for the 2019 tax reporting year later this summer.

Although the penalties for failure to furnish 1095-C forms and file forms 1094-C and 1095-C constitute separate penalties, they do go hand in hand, as the fines for each violation are the same.

Unfortunately, if you failed to meet the deadlines for 2018 or 2019 – for both furnishing forms to employees and not filing on time – you could be hit with the maximum fine of $520 or $540 per return not furnished and filed, respectively. The fines increase each year.

Similar to a Letter 226J, if you receive a Letter 972CG, it is important to timely respond to the IRS. When responding to a Letter 972CG, you can contest a proposed penalty by showing that any failure was due to reasonable cause and not willful neglect, by including a written statement that (a) states that there was reasonable cause and not willful neglect due to either certain events beyond your control or significant mitigating factors, (b) sets forth all the facts alleged to establish reasonable cause, (c) is signed by the person required to file the Form 1094-C and 1095-C, and declares the statement is made under penalty of perjury. Failing to respond to the IRS’ Letter 972CG may deprive you of the ability to apprise the IRS of your facts and circumstances that could limit or potentially eliminate your liability for any proposed assessed penalties.

Further, even if you did not timely file your forms in prior tax years, there’s still time to ensure timely file your Forms 1094-C and 1095-C for the 2020 tax year. The deadline for electronically filing your forms for the 2020 tax year is March 31, 2021. Timely filing this tax year may help your reasonable cause statement discussed above, as one factor the IRS considers is whether you acted reasonably both before and after any failure.

What are the fines for failing to file and furnish 2020 ACA forms?

To avoid fines for the 2020 reporting year, your applicable Forms 1094 and 1095 must be filed with the IRS no later than March 31, 2021 (the deadline to file paper forms was March 1, 2021 and the deadline to furnish forms to employees was March 2, 2021) . If you file after the deadline, the fines will be exacted as follows depending on your company’s gross receipts:

  • After March 31, but within 30 days:Subject to $50 fine per return not filed. Cannot exceed an annual maximum of $565,000 (for companies with gross receipts greater than $5 million) or $197,500 (for companies with gross receipts of $5 million or less).
  • After 30 days through Aug. 1:Subject to $110 fine per return not filed. Cannot exceed an annual maximum of $1,696,000 (for companies with gross receipts greater than $5 million) or $565,000 (for companies with gross receipts of $5 million or less).
  • After Aug. 1:Subject to $280 fine per return not filed. Cannot exceed annual maximum of $3,392,000 (for companies with gross receipts greater than $5 million) or $1,130,500 (for companies with gross receipts of $5 million or less).
  • “Intentional disregard” after Aug. 1:If the IRS believes you “willfully” missed the deadline, you’re subject to $560 fine per return, and there is no annual maximum cap.

Are there other reasons employers should meet the deadline for filing their forms for tax year 2020?

Yes. As the IRS reported in Notice 2020-76, the filing for tax year 2020 is the last year the IRS intends to provide relief to employers who show they made a good faith effort to comply with the filing requirements (e.g., gathering and transmitting the necessary data to an agent for filing). The good faith effort standard relieves employers of certain penalties if the employer timely furnishes and files the forms but, while they attempted to accurately complete the forms, some of the information was incorrect or incomplete. The key takeaway is that you must deliver forms to employees and file them by their respective deadlines for this relief to apply.

Failure to File for ALEs

Finally, the IRS will send a Letter 5699 to any employer who the IRS believes was an ALE in an applicable tax year and from whom the IRS did not receive a 1094-C or any Forms 1095-C. The IRS uses the number of W-2s filed by an employer (on an EIN basis) as a basis for its belief that Forms 1094-C and 1095-C were required to be filed. As with all other notices from the IRS, it is important for an employer to respond to a Letter 5699 within the 30-day deadline and indicate whether the employer (a) offered coverage for the applicable tax year and already submitted forms. They would need to provide the filing date, employer name and EIN. If they have the transmission ID if the forms were electronically filed, this is also helpful, (b) was an ALE for the year in question and, if they are allowed to paper file, they can submit their forms along with the response, (c) was an ALE in the applicable year and intend to submit their forms within the next 90 days (or explain why more time is necessary if they cannot meet the 90 day deadline), or (d) were not an ALE for the applicable tax year.

As with Letters 226J and 972CG, in summer 2020, the IRS issued Letters 5699 primarily for the 2018 tax year. We expect to see Letters 5699 for the 2019 tax year beginning in late summer of this year.

Conclusion

The IRS has been very active in its pursuit of employers in all of the above scenarios – failure to file, failure to timely file, failure to provide complete or accurate information, failure to file electronically, and failure to meet the employer shared responsibility requirements. Employers are encouraged to meet the March 31, 2021 electronic filing deadline for tax year 2020, and to prepare for their 2021 filing (due in 2022) by developing a solid plan for ensuring accurate and complete information is provided to your filing vendor since the good faith effort relief will no longer be available. Finally, employers are encouraged to timely and accurately respond to the IRS should they receive a Letter 226J, 5699, or 972CG.

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