Please read our updated view on this issue after our conversation with the IRS after the proposed regulations were released.
One of the most common errors employers are receiving when submitting the Form 1094-C/Form 1095-C packet is an error message stating there is an incorrect taxpayer identification number (TIN). The incorrect TINs could be a result of incorrect data entry, a marriage that occurred during the year changing the employee’s last name which no longer matches the system the federal government uses, or an employee intentionally falsifying his/her TIN. Regardless of the reason, an employer needs to take appropriate steps to avoid a penalty for filing a Form 1095-C with incorrect information. While it is true that the IRS will accept Forms that only have an incorrect TIN error, the employer still must make a good faith effort to validate the TIN. This article is intended to explain how an employer can fulfill its good faith effort to validate the TIN.
In 2015 an employer can be assessed a penalty of up to $250 for each Form 1095-C submitted with incorrect information. Similarly, an employer can be assessed a penalty of up to $250 for each Form 1095-C statement provided to an employee with incorrect information. The Form 1095-C submitted to the Internal Revenue Service (IRS) is likely to contain the same incorrect TIN supplied to the employee. Therefore, the penalty should be viewed as up to $500 for each incorrect TIN. However, if proper procedures are followed, an employer can avoid all these penalties.
Regulations clarify the penalties can be waived if the incorrect information submitted is due to reasonable cause and is not due to willful neglect. An employer will have to prove it acted in a responsible manner both before and after the incorrect information was submitted. In establishing its case an employer will have to show mitigating factors for the failure such as the employer not having known of the incorrect information (for example using a TIN from a previous filing requirement) or the employer’s history of compliance with reporting requirements. Additionally, an employer will have to show that the incorrect information was due to events beyond its control. With an incorrect TIN this element can be satisfied by showing the incorrect information was supplied by the employee upon whom the employer relied in good faith. An employer will need to have evidence the incorrect TIN was supplied by the employee.
Finally, an employer will have to show it acted in a responsible manner. Acting in a responsible manner means the employer exercised reasonable care and took reasonable steps to avoid or mitigate the incorrect information. Taking reasonable steps may include requesting an extension to correct the information, attempting to prevent the incorrect information submission if foreseeable, acting to remove the cause of the incorrect information, and correcting the incorrect information as promptly as possible once the failure is discovered.
Fortunately, the regulations have detailed instructions on how to prove an employer acted in a responsible manner in the event of an incorrect TIN. First, an employer must make an initial solicitation of the employee’s (or other dependents’) correct TIN at the time the relationship is formed. This initial solicitation is not required if an employer has already had access to the employee’s (or other dependents’) TIN such as through past filings with the government. An employer has likely already performed the initial solicitation when it collected the TIN from the employee and the dependents (if any). This will be the end of the inquiry unless an employer is notified that the TIN is incorrect.
Unless otherwise instructed by the IRS an employer must try to obtain the correct TIN through a first annual solicitation if it is notified of the incorrect TIN. The first annual solicitation must be made on or before December 31 of the year in which the employer was notified of the incorrect TIN unless the employer was notified of the incorrect TIN in December in which case the employer’s first annual solicitation must be made by January 31 of the following year. The employer will have to make a second annual solicitation if the employer is notified in any following year that an employee’s (or other dependents’) TIN is incorrect.
For example, suppose an employer is informed on June 15, 2016 that one of its Form 1095-Cs has been submitted with an incorrect TIN. The employer would have to make its first annual solicitation by December 31, 2016. However, if the employer is informed on December 2, 2016 that one of its Form 1095-Cs has been submitted with an incorrect TIN, the employer would have to make its first annual solicitation by January 31, 2017. While this is the first year the Form 1095-C can trigger the first annual solicitation, it is expected almost all first annual solicitations will be required to be made by December 31, 2016. As a best practice, and to stay on top of this issue, it is prudent to make the first annual solicitation within the month an employer is informed of an incorrect TIN being submitted on a Form 1095-C. This is particularly true in light of error corrections being required to utilize the good faith efforts standard in 2015. A corrected Form 1095-C should be filed as soon as possible. Waiting until December 31, 2016 may not meet the “as soon as possible” corrections standard.
The rules above are the rules discussed in the regulations and are fairly clear. However, notice 2015-68 has modified the rules for reporting entities filing the Form 1095-B or Form 1095-C. Notice 2015-68 states an entity will not be subject to the penalties for the failure to report a TIN if the entity follows the regulations set forth at section 301.6724-1(e) which are virtually identical to the regulations discussed above (the section 301.6724-1(f) regulations for incorrect TINs) with the additional modifications:
The initial solicitation is made at an individual’s first enrollment or, if already enrolled on September 17, 2015, the next open enrollment;
The second solicitation is made at a reasonable time thereafter, and
The third solicitation is made by December 31 of the year following the initial solicitation.
Confusingly, publication 1586 appears to extend these three modifications to incorrect TINs. While a publication does not have the force and effect of law, publication 1586 has only escalated the confusion regarding incorrect TINs. The additional modifications, like the regulations, require up to three solicitations. However, the timing of the additional modified solicitations is not clear for incorrect TINs. For example, an employer who submits a Form 1095-C with an incorrect TIN has already obtained the employee’s TIN (which is incorrect). We assume this meets the initial solicitation requirement (a position supported by the preamble to the section 6055 final regulations) and it is likely to have occurred when the employer/employee relationship was formed. The employer likely learned of the incorrect TIN when submitting the Form 1095-C sometime in June 2016. This will trigger the second solicitation requirement which must be made within a reasonable time according to publication 1586 compared to before December 31 of the year in which the employer was notified of the incorrect TIN unless the employer was notified of the incorrect TIN in December in which case the employer’s solicitation must be made by January 31 of the following year as discussed in the regulations (see section 301.6724-1(f)(1)(ii)). However, as we suggested above when discussing the regulations, it is best for an employer to stay on top of its solicitation obligations. Therefore, we suggest making the solicitation in the month the employer receives information that a Form 1095-C had an incorrect TIN. Taking this course of action would make the employer compliant with both publication 1586 and the regulations.
Finally, according to notice 2015-68 and publication 1586, if the employer has still not received a correct TIN, a third solicitation would need to be made by December 31 of the year following the initial solicitation. What is confusing about this is an employer may have made its initial solicitation when the employer/employee relationship was formed which could be years ago. This would make “December 31 of the year following the initial solicitation” impossible. Perhaps a better interpretation, more consistent with the regulations, is the third solicitation must be made by December 31 of the year following the second solicitation. While publication 1586 and the regulations are not entirely consistent, an employer making its second solicitation (under publication 1586) or the first solicitation (under the regulations) in the month the employer receives information of an incorrect TIN should put the employer on the right path to fulfilling its obligations and avoiding any penalties.
The solicitation obligation could be different in the case of the Form 1095-B or in the case of an employer who sponsors a self-insured plan and, consequently, needs to complete Part III of the Form 1095-C. In those cases, an employer is more likely to have had initial solicitation responsibilities in 2015 as it is possible the employer did not have the TINs for certain individuals covered by the health plan. Here the guidelines discussed in notice 2015-68 make more sense. After talking to people at the IRS, missing TINs was more the concern of notice 2015-68 as opposed to incorrect TINs.
An employer may satisfy the solicitation requirement discussed above by mail, telephone, or by requesting the TIN in person. However, due to documentation concerns, the mail solicitation or in person solicitation are the most viable options. For that reason the telephone solicitation procedures are not discussed and are not recommended. Publication 1586 also discusses how the solicitation obligation can be handled electronically. However, we are skeptical this is the best route for the typical employee or dependent who has an incorrect TIN because the individual may not have access to the proper technology. Therefore, the procedures for the electronic solicitation are not discussed.
To satisfy the solicitation request via mail an employer must include:
A letter informing the employee (or other dependents) that he/she must provide a correct TIN and that he/she is subject to a $50 penalty imposed by the IRS under IRC section 6723 if he or she fails to do so;
A Form W-9 or an acceptable substitute form on which the employee (or other dependents if necessary) may provide a correct TIN; and
A return envelope for the employee (or other dependents if necessary) to provide the TIN which may include prepaid postage.
The regulation does not provide details on how an in person solicitation should be completed. However, at a minimum it would appear the employer must request the correct TIN and inform the employee (or other dependents if necessary) that he/she is subject to a $50 penalty imposed by the IRS under IRC section 6723 if he or she fails to provide a correct TIN. Additionally, the employer should document it made the in person solicitation.
As with other provisions under the Affordable Care Act, documentation and proving compliance should always dictate the course of action an employer selects. For this reason we believe an employer who has solicitation obligations should either use the mailing option or the in person option with additional paperwork to verify the TIN request as described above.
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 newly created 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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