The IRS recently released a memo from the Office of Chief Counsel that addresses how long the IRS has to assess ACA penalties. You can read a copy of the memo here.
In short, the IRS has determined that there is no limit on the amount of time they have to assess ACA penalties. This means it’s absolutely critical that employers comply with ACA requirements so they aren’t subject to potential fines forever.
If you’d like more information, we offer a full breakdown of the release below.
Individuals and companies are required to file tax returns with the IRS. These returns show if the filer owes money to the IRS for the reporting period.
Tax filings have to meet various criteria to be considered a “return.” One of the requirements is the disclosure of information that allows the IRS to determine the amount of tax liability.
The IRS has a limited amount of time to challenge tax filings. This is known as the “statute of limitations.” The standard period is three years after the return is filed. More information is available in Section 6501(a) of the Internal Revenue Code.
In addition to tax filings, the ACA requires certain employers to file health coverage information with the IRS each year. These “applicable large employers” do this by filing a Form 1094-C, along with copies of the 1095 forms sent to employees each year.
Employers are required to file this information so the IRS can determine if they owe any penalties under the ACA. The IRS does this by matching up this information with the information they receive from exchanges and individual taxpayers. This allows the IRS to determine if any full-time employees were eligible for tax credits through an exchange.
The penalties are excise taxes known as “employer shared responsibility payments” or ESRP for short. There are two types of penalties:
4980H(a). This penalty applies if at least one full-time employee qualifies for a tax credit on an exchange – and the employer fails to offer minimum essential coverage to least 95% of its full-time employees (or all but five of its full-time employees, if five is greater than 5%).
4980H(b). This penalty applies if the employer fails to offer affordable, minimum value coverage to employees. This tax is calculated by multiplying $3,860 (for 2020) times the number of full-time employees who qualify for tax credits through an exchange.
If the IRS decides that an employer owes a penalty, they send the employer a Letter 226-J.
Here’s the logic followed by the IRS to reach its decision:
The ACA forms filed by employers don’t contain the information needed to determine tax liability. That means they’re not officially returns. And because they’re not returns, they’re not subject to the statute of limitations that apply to return filings.
Since ACA filings aren’t returns, and because Section 4980H doesn’t contain a statute of limitations, the IRS can assess 4980H penalties at any time without limit.
There’s very little employers can do to protect themselves for previous year filings. If you receive a Letter 226-J, don’t ignore it! Make sure you work with experienced experts to reply to the IRS. This is your best chance to minimize the amount of any penalty you may have to pay.
Going forward, employers should do everything they can to comply with all ACA requirements. It’s critical that employers document offers of coverage and complete 1095 forms correctly. Failure to do so could lead to heavy fines at any point in the future.
UnifyHR helps employers meet their ACA requirements. We offer full and reporting-only services and Letter 226-J support. We also help employers with state filing requirements like those in New Jersey and Washington DC.