Assessing employer shared responsibility penalties
Is your client an applicable large employer that has received rejected Forms 1095-C from the IRS? If so, it is not alone. The good news is that there are a few ways advisers can help organizations face the challenge.
The background: We now know that the IRS was unprepared for the 2016 employer shared responsibility information filing season, according to the Taxpayer Advocate Service 2016 Annual Report to Congress. It reports that the IRS was not equipped to test the accuracy of the information reporting data before the 2016 filing season—it anticipated receiving 77 million Forms 1095-C from ALEs while it actually received 104 million such returns by the end of last August, with 5.4% of such Forms 1095-C being rejected.
The given reasons for the rejected returns include faulty transmission validation, missing attachments, errors in reading the file or duplicate files. Congress could certainly help the IRS, and therefore help ALEs, by expanding the taxpayer identification number matching program to include health insurers and self-insured employers that are required to file Form 1095-B. But it has yet to act.
By not expanding the matching program, information return reporting leads to mismatches and unnecessary notices, which are all occurring now. This is causing concern over the possible assessment of employer shared responsibility penalties and penalties for failure to timely, and correctly, file information returns.
As of this writing, we have been unable to determine whether any of these types of penalties have been assessed, although based on the TAS, it appears that none have as of yet. The IRS explains in its Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, in Q&A no. 56, that it expects to send letters in early 2017 informing ALEs of their 2015 potential liability.
This is of particular concern to ALEs because efforts that must be taken to either correct or confirm that correct information was submitted to the IRS are costly and time-consuming. It is especially frustrating if the information provided to the IRS is correct, but due to TIN mismatches, the automatic rejection errors were “false positives.”
Practical tips for dealing with rejected returns
There are few ways, short of communicating with each employee about the rejected return, to determine whether the return is correct or whether it was rejected due to a false positive. We provide a few practical tips to navigate this latest employer shared responsibility development.
- ALEs should revise and resubmit rejected returns if the rejection was due to faulty transmission, validation, missing attachments, error reading the file or duplicate file. Remember, an initial rejection after an IRS computer review is not the same as a notice of a penalty assessment.
- If the rejection is more complicated, for example a Form 1095-C was rejected due to a TIN mismatch, ALEs should spot-check to see whether these are actual errors or false-positives.
- If and when the IRS issues rejection notices with an assessment of proposed penalties, ALEs should decide whether to appeal the penalty assessment. Such notices will include instructions for appealing the rejection and penalty assessment.
With respect to information reporting that gives rise to assessments of employer shared responsibility penalties, pre-existing regulations require the IRS to inform employers of their potential liability and provide them with an opportunity to respond before any penalty is assessed or notice and demand for payment is made.
Note that ALEs reporting and employer shared responsibility assessments were slated to be effective for the 2014 calendar year, but the IRS delayed the effective date until 2015 and to 2016 for employers between 50-99 employees.
For 2015, the IRS provided eight forms of transition relief related to the assessments and reporting, and made clear in 2016 and then again in 2017 that employers that made good faith efforts to comply with information reporting and could show “reasonable cause” under Treas. Reg. § 301.6724-1, would likely be able to avoid reporting penalties.
In any event, ALEs should continue to monitor the situation, keep all documentation from the IRS and make note of any correction attempts, including for potential reasonable cause relief from penalties. ALEs should continue to respond to rejected returns and otherwise comply with all existing reporting requirements.