ACA Season Preparation: Deadlines and Penalties Get Serious

The Affordable Care Act (ACA) survived an onslaught of resistance and repeal attempts last summer, and ACA reporting for tax year 2017 reporting is definitely happening. This year, unlike in years past, extended filing deadlines are unlikely and financial penalties are very real.

For filers, both the complexity and the risk of ACA filings are increasing. The days of the IRS forgiving late or incorrect filings on a “good faith” basis are over. Just trying to get ACA reporting right isn’t good enough anymore, and the process of transmitting files to the IRS and individuals is rife with risk.

Outsourcing reporting to a third party is the safest and most efficient way to handle ACA reporting, but organizations can do it in-house if they’re willing to take on a series of challenges. Here is a look at the requirements for both options as well as updated information on deadlines and penalties.

Deadlines and Penalties

For the last two years, the IRS extended deadlines for ACA reporting. There is no indication, however, that there will be an extension this year. In fact, an extension seems very unlikely at this point. The deadlines for tax year 2017 are tight: Jan. 31 for recipient statements and March 31 for transmittals to the IRS.

Similarly, the IRS has, in the past, offered a “good faith” approach to penalties, essentially abating penalties if organizations could prove that they had done their best to report accurately and on time.

That is no longer the case. Abatements will still exist for “reasonable cause” and “inconsequential errors and omissions,” but the IRS will make abatements more difficult to prove and will issue penalties for inaccurate or late reports regardless of “good faith” effort.

Penalties have also increased in severity:

• Failure to file correct and/or timely returns: $260 per return (maximum $3,193,000)
• Intentional disregard for filing correct or timely Returns: $530 per return (with no maximum)

But filing late is still subject to smaller penalties than not filing at all:

• Forms filed within 30 days of due date: $50 per return (maximum $532,000)
• Forms filed after 30 days of due date but before August 1: $100 per return (maximum $1,596,000)

Checking and Scrubbing Data

With deadlines and potential penalties looming, organizations should already be preparing for ACA reporting season. Those that outsource reporting will have a lot less work to do, but for any organization, the first step is relatively simple: Read up on reporting requirements.

The IRS provides guidance on its ACA Information Returns (AIR) system and also has a Quick Alert email subscription service that provides notifications of maintenance windows and other AIR happenings and disruptions. Sovos posts regulatory updates and offers the Compass service for comprehensive regulatory news and analysis.

Reading is fundamental, but the real work begins with testing data. Organizations need to know that they can pull data from multiple systems. They also need to make sure that their data is clean:

• By far, the most common reporting error is a name-TIN mismatch on forms. Ensuring name-TIN matches before filing is critical and can avert both penalties and the hassle of corrections and abatements.
• Invalid characters such as apostrophes, double spaces and hyphens can cause a form to be rejected. In some cases, an apostrophe might be allowed in one area of a form but not another. Scrubbing invalid characters is an exceptionally difficult and time-consuming process better left to an automated system.
• Schema validation is another important step. Does the layout of the file to be transmitted comply with requirements? One common snafu here is double reporting—repeating name, tax identification number (TIN) and account information in more than one form within a file to be transmitted.
• Ensuring that receipt IDs are correct is yet another issue. The IRS assigns receipt IDs to files in case of replacement or corrections. If a correction or replacement is necessary, the organization needs receipt IDs from its original transmittal or previous correction. Incorrect receipt IDs can lead to problems in getting forms corrected in a timely manner, but manually logging IDs is a difficult and time-consuming process.

Once data is clean and ready to upload, the organization needs to make sure it can work with AIR. It’s best to test communication with AIR before trying to upload a full transmittal. Access to air, though, requires applying for or renewing registration to use IRS e-Services tools via an Information Return Transmitter Control Code (TCC).

Organizations can upload via their own TCC or via that of a third party. It’s important to be aware, though, that the process of receiving a TCC can take months, so organizations that apply for one late in the calendar year might already be acting too late.

The Benefits of Outsourcing

With clean data flowing smoothly from multiple systems, and with a TCC in hand, organizations can send forms 1094/1095 B and C to recipients and upload files to AIR. The processes involved in getting to that point, though, are cumbersome. Outsourcing to a third-party is one way to cut time, cost, hassle and risk out of the reporting process.

For example, Sovos offers services that greatly reduce the complexity of ACA reporting, such as:

• Checking for name-TIN accuracy before filing
• Scrubbing invalid characters automatically prior to transmittal
• Validating schemas and eliminating double reporting
• Sending data directly from Sovos ACA to AIR with no uploading required by the customer
• Auto-importing of receipt IDs
• A Sovos IRS e-Services TCC customers can use with AIR

For the first time, in terms of both deadlines and penalties, ACA compliance requirements have real teeth. With ACA reporting becoming both riskier and more complex, organizations that want to control costs and mitigate risks should consider outsourcing ACA reporting to a third party such as Sovos and therefore taking some major items of the ACA reporting checklist.