05 Apr IRS Continues Enforcing ACA With New Round of Penalty Letters
For the 2015 and 2016 tax years, the IRS has been using Letter 5699 to notify employers it suspects of being an ALE that did not distribute and file Forms 1094-C/1095-C. The IRS appears to be relying on the number of Forms W-2 filed to identify potential ALEs. Any employers who receive this letter from the IRS should act quickly to respond or risk penalty exposure for failure to furnish and file form under IRC Sections 6721 and 6722.
Employers who receive Letter 5699 should respond by using the enclosed checklist where the employer can indicate one of the following options:
- Confirm ALE status for the calendar year in question and that the 1094-C and 1095-C Forms were filed by a different EIN;
- Enclose the 1094-C/1095-C Forms with the response to the 5699 Letter (only available for ALEs issuing less than 250 1095-C Forms for the calendar year);
- Confirm ALE Status and that the Forms will be filed within 90 days;
- Advise that not an ALE for the calendar year and explain the reasons; or
- Respond with the specific problems or situation as to why the 1094-C/1095-C Forms have not been filed and provide a plan of action.
Those employers who do not respond to Letter 5699 will then receive a Letter 5698 generally within two or three months again asking for a response and advising of the potential assessment of penalties under IRC Sections 6721 and 6722. If the employer fails to respond to Letter 5698, the IRS will eventually issue Letter 5005-A with proposed penalties, which are calculated based on the number of Forms W-2 the employer filed in the applicable tax year.
For example, in 2016, the penalty for failure to file or furnish a Forms 1094-C and 1095-C is $260 per form. Accordingly, if the employer filed 500 Forms W-2 in the 2016 tax year, the proposed Section 6722 penalties for failure to furnish Forms 1095-C would be $130,000 (500 x $260) and the proposed Section 6721 penalties for failure to file Form 1094-C and Forms 1095-C would be $130,260 (501 x $260). Thus, the total proposed penalties would be $260,260. These Section 6721 and 6722 penalties are also separate and in addition to any penalty exposure that the employer may have under Section 4980H related to noncompliance with the employer shared responsibility requirements.
Given that the total penalty exposure can escalate quickly, it is important that employers do not ignore the initial 5699 letter and consider the following tips when responding:
- Ensure all Forms 1095-C include accurate codes and are only issued to employees who are eligible to receive the Form 1095-C (i.e., employees who are full-time employees under IRS rules and/or employees enrolled in self-insured coverage, if applicable)
- Ensure all Forms 1095-C are issued to the employee by the EIN that issued that employee’s Form W-2 for the tax year in question. Some ALEs mistakenly think that the Form 1095-C should be issued by the Aggregate Controlled Group member who sponsors the plan instead of the EIN for whom the employees received a Form W-2.
- IF the ALE member has 250 or more Forms 1095-C to file, the ALE must file electronically for the tax year in question. Finding a third-party vendor who is authorized to file the 1094/1095-C Forms for the tax year in question is very important and can be difficult to do. An ALE who did not apply for its TCC and go through the necessary testing in order to file electronically in the AIR system for the calendar year at issue cannot do so today. For example, if an ALE must file the 1094/1095-C Forms electronically for the calendar year of 2017 in 2019, there is no other option than to find a TCC filer approved to file in 2017 and find out if the filer can still file for 2017.
The IRS continues to make ACA enforcement of ALE obligations a priority. When ALEs receive a Letter 5699, they should act quickly to correct any filing mistakes to ensure they are in the best position to avoid Section 6721 and 6722 penalties. ALEs who fail to respond to Letter 5699 and receive Letter 5005-A with proposed penalties only harm themselves, as they will likely have a higher bar to meet in terms of avoiding these same penalties.
In our next article — what is required in a response to Letter 5005-A.