March 5, 2020
The scariest thing about the Affordable Care Act (ACA) for every employer is the massive penalties associated with it. Many employers have received a notice of proposed penalties under Internal Revenue Code (IRC) sections 4980H(a) or 4980H(b) (also known as the employer mandate penalty or employer shared responsibility payment) for hundreds of thousands of dollars. In fact, it is not uncommon to see penalties under the employer mandate exceed $1,000,000. In 2019 the IRS started hammering employers with proposed penalties under IRC sections 6721 and 6722. These penalties frequently exceeded $100,000. One often overlooked question when discussing IRS penalties is whether a statute of limitation applies. The IRS recently addressed the statute of limitation question with respect to the IRC section 4980H penalties. The remainder of this article examines the IRS’ position and the statute of limitation questions related to the other prominent employer related ACA penalties being assessed under IRC sections 6721 and 6722.
The Statute of Limitation and the Section 4980H Penalties
An IRS memorandum released by the Office of Chief Counsel recently made it clear that the IRS’ position is that there is no statute of limitation for penalties being assessed under IRC sections 4980H(a) or (b). Therefore, an employer could still be penalized under IRC section 4980H for the 2015 reporting year. And, if the IRS does not penalize an employer for the 2019 reporting year until 2030, that is theoretically possible.
The IRS’ conclusion is based on IRC section 6501 and case law interpreting it. IRC section 6501 states that the penalty imposed by the code should be assessed within three years after the return was filed. Thus, the three year statute of limitation clock begins once the return is filed with the IRS. However, for IRC section 6501 to apply the taxpayer must be required to report on the return a liability for payment. Applying the facts to the returns associated with the section 4980H penalties, the question becomes do the Forms 1094-C and 1095-C report a tax liability to the IRS.
The Supreme Court in Beard v. Commissioner created a four part test to determine if a document is sufficient for the three year statute of limitation to begin to run upon the returns filing. Beard held the following four factors must be satisfied for the statute of limitation to begin to run:
- There must be sufficient data to calculate the tax liability;
- The document must purport to be a return;
- There must be an honest and reasonable attempt to satisfy the requirements of the tax law; and
- The taxpayer must execute the return under penalties of perjury.
The applicable question examined by the Office of Chief Counsel memorandum is whether the Forms 1094-C and 1095-C meet the Beard standard so that the three year statute of limitation clock can begin upon the returns being filed with the IRS. The IRS took the position in the memorandum, and we agree, that it does not. The reason is the first prong of the Beard test is not satisfied. Determining whether an employer is subject to IRC section 4980H penalties requires, among other things, an inquiry into whether any full-time employee is receiving a premium tax credit. The premium tax credit information necessary to enforce either penalty under IRC section 4980H is not reported anywhere on the Forms 1094-C and 1095-C. Therefore, filing the Forms 1094-C and 1095-C with the IRS does not start the statute of limitation clock. In fact, nothing does!
The Statute of Limitation and the Section 6721 Penalties
In 2019, many employers were slammed with proposed penalties under IRC sections 6721 and 6722. Therefore, it is a worthwhile endeavor to examine if the three year statute of limitation discussed in IRC section 6501 would apply to IRC sections 6721 and 6722 penalties associated with the Forms 1094-C and 1095-C. IRC section 6721 applies to Forms provided to the IRS while IRC section 6722 applies to Forms furnished to employees.
IRC section 6721 can apply in four different scenarios when filing the Forms 1094-C and 1095-C. First, IRC section 6721 is one tool at the IRS’ disposal to penalize an employer who does not file the Forms 1094-C and 1095-C with the IRS. Under this first scenario, as a result of the Forms 1094-C and 1095-C not being filed with the IRS, the three year statute of limitation clock would never begin. Therefore, the IRS would have no limitation on the period in which it could penalize an employer for not filing the Forms 1094-C and 1095-C with the IRS.
The second, third, and fourth scenario in which IRC section 6721 can be utilized by the IRS is for penalizing employers for filing incorrect, incomplete, or late Forms 1094-C and 1095-C. Unlike the first scenario, in these scenarios the employer filed the Forms 1094-C and 1095-C with the IRS. Examining the factors discussed in Beard, the IRS could calculate the employer's tax liability under IRC section 6721 with regard to the Forms 1094-C and 1095-C. Thus, satisfying the first factor of Beard. Additionally, the Forms would constitute a return and the taxpayer completes the Forms under a penalty of perjury. Therefore, the second and fourth factor of Beard would be satisfied. Presuming Beard’s third requirement of an honest and reasonable attempt to satisfy the tax law is made, once the Forms 1094-C and 1095-C have been filed with the IRS, the three year statute of limitation clock would begin. Consequently, if an employer is worried about the Forms 1094-C and 1095-C it filed on March 31, 2017, it can pop a bottle of Champaign at the end of this month as the three year statute of limitation will have run out for the IRS to pursue a claim!
The Statute of Limitation and the Section 6722 Penalties
Similar to IRC section 6721, IRC section 6722 can also apply to four different scenarios when discussing the Forms 1094-C and 1095-C. However, there is a large difference when comparing IRC sections 6721 and 6722. As previously discussed, IRC section 6721 applies to returns that were provided or were supposed to be provided to the IRS. To the contrary, IRC section 6722 applies to statements (in this case the Form 1095-C) that were furnished or were supposed to be furnished to full-time employees. This muddles the analysis particularly with the second, third, and fourth scenario of furnishing incorrect, incomplete, or late Forms 1095-C to a full-time employee.
The first scenario under IRC section 6722 of not furnishing a full-time employee a Form 1095-C remains unchanged from the IRC section 6721 analysis. If an employer fails to furnish a Form 1095-C to a full-time employee, the three year statute of limitation will not begin. To date we have only seen the IRS propose penalties under IRC section 6722 in cases where the employer failed to file the Forms 1094-C and 1095-C with the IRS. The IRS then presumes the employer never furnished the Forms 1095-C to the employer’s full-time employees and proposes a penalty based on those assumptions under IRC section 6722. It is pretty clear that the three year statute of limitation clock would not begin for an employer who does not furnish the Forms 1095-C to the necessary full-time employees. Therefore, filing is the first potential step in getting the three year clock to start ticking when discussing IRC section 6722.
The second, third, and fourth scenario in which IRC section 6722 can be utilized by the IRS is for penalizing employers for furnishing incorrect, incomplete, or late Forms 1095-C to full-time employees. However, the analysis discussed above breaks down at this point as the furnishing of the Form 1095-C is not a return filed with the IRS. Instead, the Form 1095-C is furnished to a full-time employee and is referred to as a payee statement. In fact, any time the instructions to the Forms 1094-C and 1095-C discuss the Forms being filed with the IRS, the word “return” is used. However, any time the instructions discuss the Forms 1094-C and 1095-C being furnished to a full-time employee, the term “payee statement” is used. This language may matter significantly with regard to the statute of limitation, particularly because it appears the second element of Beard is not completely satisfied. As a result, the questions as to whether the three year statute of limitation clock begins to tick once the Forms 1095-C are furnished to the requisite full-time employees is not clear.
There is a persuasive case to be made that furnishing the Form 1095-C to the full-time employee would start the clock for the three year statute of limitation. It could be argued that the Form 1095-C being furnished to the full-time employee is the “return” referenced in section 6501 and in Beard. The reason for that argument is the Form 1095-C provided to the full-time employee is identical to the Form 1095-C the IRS receives from the employer regarding that particular employee. This matter has not been decided and it is impossible to predict how the IRS and a court would interpret the issue.
What is clear, is filing timely with the IRS and furnishing the Forms 1095-C to the appropriate people in a timely manner is mandatory. As we stated above, we have only seen IRC section 6722 utilized by the IRS against employers who also did not file the Forms 1094-C and 1095-C with the IRS. Therefore, the discussion regarding the statute of limitation regarding IRC section 6722 is likely theoretical for the second, third, and fourth scenarios discussed in this section.
Despite this being the fifth year of reporting, we are still seeing and hearing about a lot of sloppy reporting. There are massive penalties associated with the ACA that can easily be avoided with proper reporting. Unfortunately, there is no statute of limitation for some of the penalties associated with the ACA. Therefore, compliance is imperative. If you are having a bad experience with ACA reporting or need assistance, please contact us. To date, we still do not have a client who has been assessed a penalty under IRC sections 4980H, 6721, or 6722. We take great pride in assisting our clients report accurately and timely on our interactive platform which allows users to update their ACA information throughout the year to see the Forms 1095-C progress. Keeping up with ACA reporting on a monthly basis makes the whole process more manageable when it is finally time to report to the IRS!
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys 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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