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Since the IRS began enforcing the Affordable Care Act (ACA), it has been lenient in its enforcement of the penalties associated with the ACA particularly with regard to late and incorrect Forms 1094-C and 1095-C. This position appears to have changed with regard to the 2017 reporting season. Recently, a number of employers received a Notice 972CG from the IRS. The Notice 972CG proposes penalties under IRC section 6721 for late or incorrect filings. The focus of this is to explain the Notice 972CG and the basic steps employers who receive this letter should follow.
Typically, the employer received a Letter 5699 inquiring why the employer had not filed the Forms 1094-C and 1095-C for the 2017 reporting season. The reasons the employer had not filed timely have varied but most employers filed the Forms 1094-C and 1095-C with the IRS well past the original due date, but well within the parameters discussed in the Letter 5699. Afterwards, these employers reported they then received a Notice 972CG from the IRS.
The Notice proposes penalties under IRC section 6721 for each late Form 1095-C filed by the employer. For the 2017 tax year, the penalty for each section 6721 violation is $260 per return. Therefore, if an employer filed 200 Forms 1095-C late, the Notice 972CG has proposed a penalty of $52,000.
The proposed penalty amounts in the Notice can be smaller than $260 per return if the employer filed the return within 30 days of the original due date (March 31 if the Forms were filed electronically not factoring in the automatic extension). If an employer filed within 30 days of the original March 31 due date, the penalty is $50 per return. If the employer’s returns were filed after 30 days of the original due date but prior to August 1 of the year in which the Forms were due, the employer’s penalty will be $100 per return. Each of these scenarios is unlikely if the employer filed after receiving the Letter 5699 as the IRS did not send these Letters out by the August 1 cutoff to allow employers to mitigate the potential penalties under section 6721.
An employer has 45 days from the date on the notice to respond to the IRS. A business operating outside of the United State has 60 days to respond to the Notice 972CG. If an employer does not respond within this time frame, the IRS will send a bill for the amount of the proposed penalty. Therefore, a timely response to the Notice 972CG is mandatory if an employer wishes to abate or eliminate the proposed penalty.
An employer has three courses of action when responding to the Notice 972CG. First, the employer could agree with the proposed penalty. If an employer agrees with the proposed penalty, box (A) should be checked and the signature and date line below box (A) should be completed. Any employer selecting this option should follow the payment instructions provided in the Notice.
Alternatively, an employer can disagree in part with the Notice’s findings or an employer can disagree with all of the Notice’s findings. If an employer disagrees in part with the Notice, the employer will check box (B). If an employer disagrees entirely with the Notice, the employer will check box (C). If box (B) or (C) are checked, the employer will be required to submit a signed statement explaining why the employer disagrees with the Notice. An employer should include any supporting documents with the signed statement. Any employer who partially disagrees with the Notice should follow the payment instructions provided in the Notice.
An employer checking box (B) or (C) in its response will have to convince the IRS that the employer’s late filing (or incorrect filing) of the Forms 1094-C and 1095-C was due to a “reasonable cause.” The Code discusses what may constitute a “reasonable cause” in exhaustive regulations that must be reviewed thoroughly before any employer responds to a Notice 972CG with box (B) or (C) checked. For an employer to establish a “reasonable cause” the employer will have to establish “significant mitigating factors” or that the “failure arose from events beyond the filer’s control.” Furthermore, to prove “reasonable cause” the employer will have to show that it acted in a “responsible manner” both before and after the failure occurred. An employer should craft its response using the template roughly outlined in the IRS regulations and Publication 1586.
Any employer who receives a Notice 972CG must take action immediately. An employer should consult an attorney or tax professional familiar with its filing process and the pertinent rules, regulations, and publications. Moving forward, it is imperative that employers file the Forms 1094-C and 1095-C in a timely, accurate fashion.
Repeal and replacement of the Affordable Care Act (ACA) by the American Health Care Act (AHCA) may be underway in Washington D.C., but until a final version of the AHCA is signed into law, the ACA is the law of the land. In fact, the IRS is currently issuing notices to employers that require them to disclose whether they complied with ACA large employer reporting duties, or their excuse for not doing so, where applicable.
The ACA required large employers to furnish employee statements (Forms 1095-C) and file them with the IRS under transmittal Form 1094-C, and the Internal Revenue Code (“Code”) imposes separate penalty taxes for failing to timely furnish and file the required forms. Large employer reporting was required for 2015 and 2016, even if transition relief from ACA penalty taxes applied for 2015. The potential penalties can be very large – up to $500 per each 2015 Form 1095-C statement ($250 for not furnishing the form to the employee and $250 for not filing it with IRS) – up to a total annual penalty liability of $3 million. The penalty amounts and cap are periodically adjusted for inflation.
Employers that failed to furnish Form 1095-C and file copies with Form 1094-C may receive the IRS notices, called “Request for Employer Reporting of Offers of Health Insurance Coverage (Forms 1094-C and 1095-C)” and also known as Letter 5699 forms. Forms may be received regarding reporting for 2015 or 2016. Employers that receive a Letter 5699 form will have only thirty days to complete and return the form, which contains the following check boxes:
The Letter also provides: “[i]f you are required to file information returns under IRC Section 6056, failure to comply may result in the assessment of a penalty under IRC Section 6721 for a failure to file information returns.”
Employers receiving Letter 5699 forms should contact their benefit advisors immediately and plan to respond as required within the thirty-day limit; it may be necessary to request an extension for employers that are just realizing that they have reporting duties and need to prepare statements for enclosure with their response. In this regard, the IRS offers good faith relief from filing penalties for timely filed but incomplete or incorrect returns for 2015 and 2016, but relief from penalties for failures to file entirely for those years is available only upon a showing of “reasonable cause,” which is narrowly interpreted (for instance, due to fire, flood, or major illness).
Large employers should not look to coming ACA repeal/replacement process for relief from filing duties and potential penalties. The House version of the AHCA does not change large employer reporting duties and it is unlikely the Senate or final versions of the law will do so. This is largely because procedural rules limit reform/repeal provisions to those affecting tax and revenue measures, which would not include reporting rules. Thus the reporting component of the ACA will likely remain intact (though it may be merged into Form W-2 reporting duties), regardless of the ACA’s long-term fate in Washington.
In July 2015, President Obama signed into law the Trade Preferences Extension Act of 2015. Included in the bill was an important provision that affects welfare and retirement benefit plans. The Act sizably increases filing penalties for information return and statement failures under the Internal Revenue Code, effective for filings after December 31,2015. Employers now face significantly larger penalties for failing to correctly file and furnish the ACA forms 1094 and 1095 (shared responsibility reporting requirements) as well as Forms W-2 and 1099-R.
Sections 6721 and 6722 of the IRC impose penalties associated with failures to file- or to file correct- information returns and statements. Section 6721 applies to the returns required to be filed with the IRS, and Section 6722 applies to statements required to be provided generally to employees.These penalty provisions apply to the ACA shared responsibility reporting Forms 1094-B, 1094-C, 1095-B, and 1095-C (Sections 6055 & 6056) failures as well as other information returns and statement failures, like those on Forms W-2 and 1099.
The Sections 6055 & 6056 reporting requirements are effective for medical coverage provided on or after January 1, 2015, with the first information returns to be filed with the IRS by February 29, 2016 (or March 31,2016 if filing electronically) and provided to individuals by February 1, 2016.
Increase in Penalties
The Trade Preferences Extension Act of 2015 (Act) contains several tax provisions in addition to the trade measures that were the focus of the bill. Provided as a revenue offset provision, the law significantly increases the penalty amounts under Sections 6721 and 6722. A failure includes failing to file or furnish information returns or statements by the due date, failing to provide all required information, as well as failing to provide correct information.
The law increases the penalty for:
Other penalty increase also apply, including those associated with timely filing a corrected return. Penalties could also provide a one-two punch under the ACA for employers and other responsible entities. For example, under Sec 6056, applicable large employers (ALE) must file information returns to the IRS (the 1094-B and 1094-C) as well as furnish statements to employees (the 1095-B and 1095-C). So incorrect information shared on those forms could result in a double penalty- one associated with the information return to the IRS and the other associated with individual statements to employees.
Final regulations on the ACA reporting requirements provide short-term relief from these penalties. For reports files in 2016 (for 2015 calendar year info), the IRS will not impose penalties on ALE members that can show they made a “good-faith effort” to comply with the information reporting requirements. Specifically, relief is provided for incorrect or incomplete info reported on the return or statement, including Social Security numbers, but not for failing to file timely.