IRS Uses Unprecedented Methods to Enforce ACA Reporting Penalties

Gerry Nelligan
January 11, 2019

This blog was last updated on March 11, 2019

With recent enforcement measures, the IRS has offered definitive proof that the Affordable Care Act (ACA) is still alive and that the agency plans to strictly enforce ACA reporting.

Last spring, the agency issued Letter 226J to Applicable Large Employers (ALEs) that failed to cover 95 percent of employees. ALEs are companies with 50 or more full-time workers. Letter 226J assessed penalties for non-compliance based on IRC 4980H and represents the standard measure the agency uses to penalize companies that run afoul of one part of the ACA regulations.

New territory for ACA reporting enforcement

But the IRS hasn’t stopped there. In an exceptional move, the agency proactively compared  ACA forms filed to W-2 forms filed in an effort to find companies that didn’t report 1095 forms, the forms used for ACA reporting. Companies that failed to report 1095 forms received IRS Letter 5699, essentially a letter asking them to justify, by a deadline, why they didn’t file and offering them a choice of five legal scenarios for explaining their failure to comply. Companies that didn’t respond by the deadline with justification received IRS penalties.

Comparing forms W-2 forms filed in order to root out non-filers of ACA forms is something the IRS has never done for filers with 1099 reporting obligations. And the penalties don’t stop there. This year, it is expected that the IRS will also issue 972CG penalties, the dreaded P notices, to companies that fail to file, file 1095 forms late or have mismatched name and Tax Identification Number combinations on their forms that they do not attempt to correct or rectify. The P notice is the same as the standard penalty notice for late or incorrect 1099 filings.

Three IRS penalties, three deadlines, one year

Essentially, then, with Letter 226J, Letter 5699 and P notices, the IRS can enforce ACA compliance via three different penalties with three different timelines for the same tax year. This type of enforcement activity is unprecedented even in decades of 1099 reporting enforcement and sends a clear message that ACA reporting is not only alive but fraught with considerable risk.

Penalties for failure to file are $270 per return, which does not include extra financial punishment for intentional disregard of filing regulations. The letters and penalty notices the IRS is sending make it clear that the agency fully intends to penalize non-compliant ALEs. The IRS is taking this action is is despite the fact that 2016 was considered to be a “good faith” filing year for the ACA.  

Limits to good faith for the IRS

In fact, the IRS has extended good faith filing for tax year 2018. However, the IRS has made clear that before the agency will grant penalty relief under good faith, the ALE will need to demonstrate that it made a reasonable effort to comply with regulations and acted in a responsible manner. Also, for good faith to apply, ALEs need to file on time. The IRS has specifically stated that not filing or not filing by the due date does not constitute good faith.  

Acting is a responsible manner also means filing any necessary corrections. For instance, an ALE that received errors for a name/TIN mismatch would need to demonstrate that it attempted to solicit correct TINs from payees and followed the recommended TIN solicitation process. This means soliciting a payee’s TIN upon enrollment, with a second solicitation made a reasonable time thereafter–generally 75 days. Finally, if the ALE still hadn’t received a TIN, it would need to solicit on December 31 of the year following the initial solicitation.

Taking ACA reporting seriously

The final analysis is that ACA reporting, and more specifically, ACA reporting penalties, are alive and well for tax year 2018. ALEs that do not have streamlined, efficient ACA reporting processes actually face potential punishments that are more severe than those involved with 1099 filing. Centralizing and automating ACA filing, on the other hand, significantly mitigates penalty risk.

Take Action

Sovos is a leader in keeping organizations compliant with ACA filing regulations. Learn more about Sovos ACA reporting capabilities and how Sovos helps clients avoid IRS penalties.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Gerry Nelligan

Gerry Nelligan is a Regulatory Analysis Supervisor at Sovos, leading a team of counsels covering information reporting, including 10-Series IRS reporting, Affordable Care Act (ACA) reporting and Automatic Exchange of Information (AEOI). Gerry received his J.D. from Suffolk University Law School and his B.A. from Providence College. He is a licensed attorney in the state of Massachusetts.
Share this post

dtc spirits new york
North America ShipCompliant
February 14, 2025
A New Era for DtC Spirits Shipping: How New York’s Market is Taking Shape

This blog was last updated on February 14, 2025 In the fall of 2024, New York became the latest state to open its doors to direct-to-consumer (DtC) spirits shipping, marking a significant milestone for the industry. As one of the most populous states with a thriving market for craft and high-end spirits, the shift was […]

North America Unclaimed Property
February 10, 2025
Delaware Announces 2025 VDA Invitation Dates

This blog was last updated on February 14, 2025 Mark your calendars – April 11, 2025 and August 15, 2025 are this year’s anticipated release dates for the Delaware’s Secretary of State (SOS) VDA program invitations. In the event that an organization receives an invitation to participate in the Voluntary Disclosure Agreement (VDA) program  , […]

North America Sales & Use Tax
February 6, 2025
The Tariff and Sales Tax Mishmash – Untying the Mess

This blog was last updated on February 14, 2025 Talk of tariffs dominates the current news cycle with some commentators suggesting that tariffs will spell disaster for our economy while others say the exact opposite. We’ve seen the stock market sometimes fluctuate as tariffs are announced but later suspended, leaving us to wonder whether an […]

retailer dtc wine shipping
North America ShipCompliant
February 6, 2025
Retailer DtC Wine Shipping: The Time Has Come

This blog was last updated on February 14, 2025 By Tom Wark, Executive Director, National Association of Wine Retailers We are often reminded by the media and those in the wine industry—as well as by wine enthusiasts—that the three-tier system of alcohol distribution in most states hinders consumer access to the expansive number of wines […]

Montana 1099-DA
North America Tax Information Reporting
February 5, 2025
State Filing Alert: Montana’s New 1099-DA Requirements for Crypto Brokers

This blog was last updated on February 5, 2025 Reporting digital asset transactions on Form 1099-DA just got a little more complicated. For 2025 transactions, crypto brokers that file Form 1099-DA with the IRS will be required to file the 1099-DA with the State of Montana. This makes Montana the first state to introduce a […]