Advisers beware: Affordable Care Act penalties are being assessed by the IRS and the enforcement process is ongoing.
Letter 226J is the penalty assessment notice that the IRS is sending to Applicable Large Employers—that is employers with 50 or more full-time or equivalent employees. The IRS believes that these organizations failed to comply with the employer mandate requirements of the Affordable Care Act for the 2015 tax year, and before year end, the IRS is expected to continue its enforcement effort for the 2016 tax year.
Receiving a Letter 226J can have serious implications. There are reports that some of them demand ACA employee shared responsibility payments (ESRPs) that are in the millions, including one for more than $20 million.
If you have a client who receives a Letter 226J, it’s important that the employer responds to the IRS by the date indicated, which generally will be 30 days from the date the letter was issued. The letter will also include the name and contact information for an IRS representative who will reply to questions. In responding, the employer should either agree with the proposed ESRP or disagree with part or all of the proposed penalty assessment. To prepare the response, review the information that was submitted as part of the employer’s 2015 ACA filing to identify any possible errors in either the completed forms or the underlying data.
Once the response has been submitted, the client should expect to receive a second letter from the IRS. This will be Letter 227, which is a series of five different letters that the IRS is using to acknowledge responses to Letter 226J. The different versions describe additional actions that may be required of an employer to address its proposed ESRP. They are listed here in their order of preference:
· Letter 227K: This is the letter that you hope your client receives. It means that the case has been resolved in the employer’s favor. Essentially, Letter 227K acknowledges that the information in the employer’s response to Letter 226J was accepted, the employer does not owe an ESRP and the IRS has closed its inquiry.
· Letter 227L: While not as thrilling as receiving Letter 227K, receiving this version of Letter 227 is still a plus. The IRS sends this version of the letter when it agrees with the employer that the amount of the ESRP owed should be reduced. While the employer will still have to make a payment, it won’t be as much as originally requested.
· Letter 227M: This version of the letter is not one that you want your client to receive. This is the version the IRS sends when it disagrees with the employer’s response to Letter 226J and reiterates its demand for the original penalty assessment.
There are two other variants of Letter 227M, one in which the IRS partially disagrees with the recalculated ESRP submitted by the employer and proposes a revised penalty that is hopefully lower than the original, and a version where the IRS seeks further clarification of the information provided by the employer and may request additional documentation.
After receiving the IRS’ response, if the client still disagrees with the proposed or revised penalties, the employer may request a pre-assessment conference with the IRS Office of Appeals. This is done in accordance with the instructions for requesting a conference provided in Letter 227 and in IRS Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don’t Agree. The conference should be requested in writing by the response date shown on Letter 227, which will usually will be 30 days from the date of the letter.
It’s important for the client to respond to all IRS notices. Failing to reply to a Letter 226J or any of the variants of Letter 227 will likely prompt the IRS to formally assess the amount of the proposed ESRP and issue the employer a notice and demand for payment, Notice CP 220J.
And that’s one IRS notice an employer definitely does not want to receive!
The same holds true for employers that have yet to submit an ACA information filing to the IRS. They can anticipate receiving a Letter 226J and a Notice CP 220J, if they continue to ignore their obligations under the Affordable Care Act. If you work with a client that should be filing ACA-related information with the IRS and has not complied, the employer should immediately submit filings for the 2015, 2016 and 2017 tax years to mitigate its potential exposure. The penalties are real, and they are already mounting.