How to Avoid ACA Employer
Mandate Reporting Gone Wrong
Good Faith Relief Gone, Guide to Understanding What is Reasonable Cause,
and What Steps to Take When IRS Transmission Status is “Accepted with Errors”
“Good Faith” Relief is Gone for Good
2020 was the final tax year for “good faith” transition relief for ACA reporting. If employers were able to show they provided and filed Form 1095 on time, and made a good-faith effort, the IRS did not impose penalties for certain missing and inaccurate information. However, this relief ended effective tax year 2021. With no more good faith effort relief to fall back on, employers can only have ACA reporting penalties waived if they can show “reasonable cause” for reporting failures.
Penalties Related to Not Filing Correctly or by IRS Deadlines
Let’s look at a real-life example.
Employer A has 150 full time employees and is subject tothe ACA reporting requirements. In previous years, the business manager has used their payroll software to help with their ACA reporting requirements but resigned and a new person was hired who was unfamiliar with the rules. As a result, Forms 1095 were not sent to the employees or the IRS by the established deadlines. In addition, the new person was not sure how to code the Forms 1095C and incorrectly applied an Affordability Safe Harbor Code to 25 of the late-filed forms. Employer A received a letter from IRS stating that Employer A was being assessed a proposed penalty of $49,000 for incorrect information and untimely submission of forms to IRS. Cue the hiring of a tax attorney to help with a response to IRS and gathering all the necessary information and paperwork to request a review and dismissal of the proposed penalty. Employer A now has incurred an additional $5,000 in legal fees and still no resolution of the penalty has been reached. This is one example of the importance of connecting employers with trusted partners to assist with compliance.
Guide to Understanding What is “Reasonable Cause”
“Reasonable cause” is a much higher standard than “good faith effort,” and we have already seen a corresponding increase in reporting-related penalty assessments since 2020. To prove reasonable cause, employers must be able to show they acted responsibly both before and after the failure occurred. Additionally, the employer must be able to prove either significant mitigating factors related to the failure, or that the failure was due to events beyond the employer’s control. Showing mitigating factors or events beyond the filer’s control alone is not sufficient to establish reasonable cause—the employer must still show proof of responsible conduct both before and after the reporting failure. To meet this extremely fact-specific determination, employers are advised to implement appropriate documentation and robust ACA reporting policies and procedures. An established history of following those policies and procedures could help convince the IRS if a future reporting failure requires the employer to establish reasonable cause.
What Steps to Take When IRS Transmission Status is “Accepted with Errors”
Do the employers you work with file their own ACA forms, or use a third-party service or vendor?
Either way, it’s essential to understand the transmission status assigned by the IRS after processing is complete.
Transmissions that are “Accepted with Errors” were complete enough to be fully processed by the IRS but need further attention from the employer because certain errors were identified. The most common errors involve mismatches between the Taxpayer Identification Numbers (TINs) listed on Form 1095-C, and the information on file with the federal government. While these mismatches may be easily resolved by following up on name changes and clerical errors, submitting ACA corrections can be a momentous task for employers to tackle alone. Corrected and/or replacement transmissions must meet tight timelines and IRS specifications in order to be considered complete and timely. As soon as possible after learning that incorrect information may have been transmitted, employers must submit their corrections, and they must do so in accordance with IRS technical specifications and requirements.
Next Steps: Connect with the Right Help Today
For trusted advisors, ACA issues present a unique opportunity to strengthen relationships. Build your own credibility by asking the right questions to recognize and resolve these potential ACA penalty risks.
Connect your own company or your clients with our resources today.