April 12, 2017

On April 7, 2017 the Treasury Inspector General for Tax Administration (TIGTA) released its findings from its audit conducted to assess the IRS’s ability to ensure compliance with the Affordable Care Act’s (ACA) employer mandate. The audit discovered several major issues with the technology being used to assist the IRS enforce the employer mandate. The technological trouble the IRS is experiencing is undoubtedly one of the reasons the IRS has not penalized a single employer under the employer mandate. This article briefly explores some of the issues discussed in the audit report and how an employer should use the findings of the report in the future.

The audit provided some insight into how the IRS plans to assess the employer mandate. The IRS plans to mail an Applicable Large Employer (ALE) member a letter about a potential employer mandate penalty. This letter will come from the IRS (as opposed to the section 1411 notice that employers started receiving in 2016 which comes from the Department of Health and Human Services (HHS)) and include the names of the employees who received a premium tax credit for the applicable tax year. The IRS will then provide the employer the opportunity to respond presumably regarding each employee listed in the letter. It will be critical that the employer responds to the IRS letter if it has a valid reason to believe it should not be subject to an employer mandate penalty. Unlike the HHS appeals process which had no teeth, an unsuccessful response or no response to the IRS would lead to the IRS providing the employer with an official notice and demand for payment as result of the employer mandate. Unfortunately, the audit report does not discuss how the IRS plans to handle discrepancies between the HHS premium tax credit determination and the information submitted on an employee’s Form 1095-C. Presumably, the IRS will have an employee’s Form 1095-C supersede any decision made by HHS with regard to premium tax credits as the HHS determination lacked the necessary safeguards for accuracy.

The first major issue the audit report discussed is the inability of the IRS’s systems to timely and accurately transfer the Forms 1094-C and 1095-C that were submitted in paper format to the electronic ACA Information Returns system (AIR system). As of July 22, 2016 only two percent of the Forms 1094-C and one percent of the Forms 1095-C submitted to the IRS via paper had been successfully transferred to the AIR system. There were several reasons for the low conversion rate to the AIR system including the IRS’s equipment being utilized to process the Forms 1040, errors in the scanning process, and programming errors which were inaccurate in identifying if an employer was an ALE. The IRS agreed with the report’s three recommendations to remedy these errors and had already corrected several of the issues when the report was released.

More problematic to most employers was the AIR system was unable to accurately generate error codes when an error condition existed. The AIR system also generated error codes when no error condition existed. The IRS created more than 155 conditions in its validation process which created 141 different error codes. Some of these error codes cause the Forms 1094-C and 1095-C to be rejected by the IRS such as a missing EIN or business name. Other error codes such as a missing employee TIN or mailing address did not cause the Forms 1094-C and 1095-C to be rejected by the IRS. However, the IRS is planning, although has yet to implement, an error rejection threshold that would result in the rejection of an employer’s Forms 1095-C when a certain number of the same error code is triggered.

The report specifically mentions the incorrect TIN issue seen by almost every employer as a recurring problem. As we have written about extensively, an employer was unable to determine which individual was causing the TIN error message as the IRS software did not specify which individual was triggering the error message. The report states the IRS was aware of this issue and stated it would be corrected for future tax years. However, the IRS software only improved incrementally regarding this issue as it relates to the 2016 Forms. With the 2016 Forms an employer is only able to determine if it is the employee or one of the dependents triggering the TIN error code. This creates an issue for any Form 1095-C that has multiple dependents listed in Part III.

The report also discusses an error it discovered with regard to line 14 of the Form 1095-C. Line 14 of the Form 1095-C describes the type of coverage, if any, that was offered to the employee, the employee’s spouse, and the employee’s dependents. It must be completed for all 12 months on each Form 1095-C submitted to the IRS. The audit reviewed an IRS management report from April 12, 2016 that had rejected 6.2 million Forms 1095-C because of a missing code in line 14. However, the auditors review of the Forms 1095-C in question showed that this error condition only occurred 828 times within the 6.2 million Forms. The sheer volume of this type of error is egregious. The report states the IRS has determined that incorrect programming and labeling were causing the inaccuracies in the IRS’s report which have since, apparently, been corrected.

The report suggested and the IRS agreed to ensure all the error codes are properly functioning for future filing seasons. More importantly, the report suggested and the IRS agreed that each error code should provide sufficient information to allow the employer to correct errors. As discussed briefly above, this still has not been achieved for the TIN error message almost all employers are receiving with the 2016 Form 1095-C. Hopefully, the IRS was more successful in achieving its stated goal for other error codes.

The audit report states the IRS planned on implementing new automation tools to enforce the employer mandate penalties in March 2017. In addition, the IRS continues to develop new systems to assist it in enforcement of the employer mandate. As of the date of this publication it is unclear if the IRS was successful at meeting its March 2017 deadline. It is baffling that the IRS did not already have functional, efficient systems in place to enforce the employer mandate penalty.

The IRS’s struggles to create the necessary tools also helps explain why no employer has been assessed an employer mandate penalty to date. However, we still expect these penalties to be assessed simply because of the amount of money the employer mandate is expected to raise to fund premium tax credits that have already been paid out. Any employer receiving a letter from the IRS regarding a potential employer mandate penalty should be skeptical given the IRS’s software issues to date. After a thorough review of the data an employer should respond to the IRS’s inquiry as, unlike an HHS appeal, the IRS has the power to monetarily penalize an employer.

Accord has created a number of tools to ensure its clients are submitting accurate data to the IRS. To date the IRS is struggling to create tools to process the data submitted on the Forms 1094-C and 1095-C. Despite reaching out to assist the IRS with possible solutions to the problems it is encountering, we have not heard back regarding our inquiries. To be fair to the IRS, the amount of data it needs to process with the Forms 1094-C and 1095-C is daunting. However, the IRS appears to have done an insufficient job of mapping and coding rudimentary elements of the process which have caused the accuracy and efficiency of its tools to collapse. Please let us know if you have any further questions or we can assist you in any way.

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 and employee benefit topics as it relates to compliance for companies.

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