May 24, 2017
Just like the 2015 reporting season, one of the most common errors employers received when submitting the Form 1094-C/Form 1095-C packet for the 2016 reporting season was an error message stating there is an incorrect taxpayer identification number (TIN). As many learned last year, the TIN error could be a result of incorrect data entry, a marriage that occurred midyear changing the last name of an individual, but frequently was caused for no apparent reason. This article is intended to explain how the IRS software searches TINs, the improvements that have been made, and what an employer needs to do if it received an error message indicating there is a TIN issue with one (or more) of the Forms 1095-C it submitted to the IRS. The good news is an employer still does not need to go through the solicitation process if it receives a TIN error message for an incorrect TIN! A recent conversation with the IRS reaffirmed this position.
The best place to start is to understand how the IRS verifies TIN numbers. Publication 1586 explains an individual’s TIN is verified by using the first four characters of the individual’s last name. For example, if the IRS was going to verify, “Ryan P Moulder”, the only characters that would matter are “MOUL”. The IRS verification process would begin by checking the TIN entered for Ryan P Moulder. If the Social Security Administration (SSA) database does not have the TIN, an error message would appear (unlike 2015 it is not an AIRTN500 error message). However, if the TIN is in the SSA database, the first four characters of the individual’s last name, in this case, “MOUL”, would be checked against the first four characters of the individual’s last name in the SSA database for the TIN entered. If the first four characters from the Form 1095-C and the SSA database do not match, a TIN error message would appear. Alternatively, if the first four characters from the Form 1095-C and the SSA database match, the TIN will be verified.
Now that we have better understanding of how the IRS verification process works let’s examine where an employer could be inserting a TIN on the Form 1095-C. If an employer’s plan is fully insured, the only place the employer will be placing an individual’s TIN on the Form 1095-C is line 2 in Part I of the Form 1095-C. Despite only having one TIN at issue, it may still be impossible for the employer to determine why the TIN error message is occurring as we saw frequently in 2015 as employers verified the name and TINs entered on the Form 1095-C with their employees.
There are more places that could trigger a TIN error message if the employer is sponsoring a self-insured plan and using the combined reporting. Under the self-insured scenario, not only would an individual’s TIN be entered on line 2 of Part I of the Form 1095-C, but also multiple individuals’ TINs could be entered in column (b) of Part III of the Form 1095-C. The instructions to the Form 1095-C state that among other items the name and TIN must be entered in columns (a) and (b) of Part III of the Form 1095-C. If an employee’s Form 1095-C covers multiple individuals, multiple names and multiple TINs will be listed in Part III of the Form 1095-C. Unlike the 2015 Form 1095-C which made it impossible to determine which individual or individuals triggered the TIN error message, the 2016 Form 1095-C allows an employer to determine which individual or individuals are triggering the error message. However, it may still be impossible for the employer to determine why the TIN error message is occurring. The IRS should be applauded for the improvements it made for identifying which individual triggered the TIN error message, but continued improvement and clarity are still necessary.
As discussed in the Proposed Regulations Clarify TIN Responsibilities and Create New Important Questions publication footnote 2 indicates a TIN error message is neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer must solicit a TIN in response to the error message. This footnote in the proposed regulations in the IRS’ view is the controlling statement with regard to an employer’s responsibility in the event an employer receives a TIN error message. The responsibility is simple. The employer does not need to do anything.
As we discussed in our previous publications, footnote 2 appears to be at odds with an employer’s obligation to file a corrected return. The instructions to the Form 1094-C/1095-C state “If you fail to file correct information returns or fail to furnish a correct recipient statement, you may be subject to a penalty. Regulation section 301.6724-1 (relating to information return penalties) does not require you to file corrected returns for missing or incorrect TINs if you meet the reasonable cause standard (emphasis added).” This statement on its face appears to be confirming footnote 2. However, the details of the 301.6724-1 regulations make the statement in instructions to the Form 1094-C/1095-C extremely confusing if not all together contradictory.
The regulations begin by stating that the penalties under section 6721 and section 6722 will be waived if the employer’s failure was due to reasonable cause and is not due to willful neglect (see section 301.6724-1(a)(1)). An employer satisfies the reasonable cause definition if there are significant mitigating factors as described in section 301.6724-1(b) or the failure arose from events beyond the employer’s control as described in section 301.6724-1(c). Additionally, to meet the reasonable cause standard an employer must establish that it acted in a responsible manner as described in section 301.6724-1(d) both before and after the failure related to the reporting (see section 301.6724-1(a)(2) flush language).
To establish significant mitigating factors, one of the avenues to meeting the reasonable cause standard, the regulations state the employer must, among other things, satisfy paragraph (d) of this section (see section 301.6724-1(b)). Similarly, for an employer to establish the failure arose from events beyond the employer’s control, the alternative avenue to meeting the reasonable cause standard, the employer must, among other things, satisfy paragraph (d) of this section (see section 301.6724-1(c)). All of these statements make it clear that for an employer to meet the reasonable cause standard an employer must comply with section 301.6724-1(d).
Section 301.6724-1(d)(1)(ii) states that for an employer to meet the standards of the regulations it must undertake significant steps to avoid or mitigate the failure, including where applicable:
- Requesting, appropriate extensions of time to file, when practicable, in order to avoid the failure;
- Attempting to prevent an impediment or a failure, if it was foreseeable,
- Acting to remove an impediment or the cause of the failure, once it occurred, and
- Rectifying the failure as promptly as possible once the impediment was removed or the failure was discovered.
It is certainly a logical interpretation that for an employer to fulfill its obligations under section 301.6724-1(d)(1)(ii) that some course of action would need to be taken to update an incorrect TIN. The TIN error message is putting an employer on notice that a Form 1095-C has an incorrect TIN. However, footnote 2 of the proposed regulations and the IRS indicate that the employer does not need to make any sort of solicitation effort as a result of an TIN error message. This is not an intuitive interpretation.
The regulations further state that for an employer to satisfy the reasonable cause requirement of section 301.6724-1(c)(1) due to the actions of another person (in this case, the employee providing a TIN) the employer would have to show it acted in good faith in relying on the TIN provided by the employee (see section 301.6724-1(c)(6)). The regulations state that this standard will be satisfied for an incorrect TIN if the employer follows the procedures for an incorrect TIN set out in section 301.6724-1(f) (see section 301.6724-1(d)(2)). The requirements of section 301.6724-1(d)(2) require an initial solicitation which would have already been made and produced the incorrect TIN. There would then need to be up to two additional solicitations to try to determine the correct TIN (see section 301.6724-1(f)(ii) and section 301.6724-1(f)(iii)).
The annual solicitations are only required if the employer is notified by the IRS that the TIN is incorrect (see section 301.6724-1(f)(i)). Many people (and my conservative view would concur) interpreted the TIN error message to be such a notification from the IRS. After all, a TIN error message is a notice and it is from the IRS, the two criteria discussed in the current regulations. However, and fortunately, the IRS is taking the position that a TIN error message is not a notification that triggers any solicitation obligation under section 301.6724-1. An employer will only have to fulfill the solicitation obligations discussed in section 301.6724-1 if it receives a Notice 972CG or a more formal notice from the IRS.
An employer will still have to fulfill its solicitation obligations for missing TINs. The regulations are clear that a TIN is considered missing if it does not contain nine digits or includes one or more alpha characters (a character or symbol other than an Arabic numeral) as one of the nine digits (see section 301.6724-1(e)(1)). A TIN will likely be considered missing by the IRS if it is obviously incorrect such as repeating digits or ascending or descending digits. If this is the case, the missing TIN solicitation procedures discussed in the proposed regulations should be followed.
While there has been a lot of confusion regarding what an employer needs to do when it receives a TIN error message, the IRS’ position is the TIN error message creates no solicitation obligation for the employer. If you want to continue to take the conservative route, there is nothing wrong with following the solicitation procedures outlined in section 301.6724-1. However, it apparently is not necessary in the IRS’ view. Please don’t hesitate to reach out to us if you need further assistance with this confusing topic.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorney's P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
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