TIGTA Report on IRS Processes to Identify Businesses Subject to Employer Shared Responsibility Payments

On March 21, 2018, the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report of processes that the Internal Revenue Service (IRS) used to identify applicable large employers (ALEs) potentially subject to an assessment under the Affordable Care Act's (ACA's) employer shared responsibility provisions. Congress established TIGTA in 1999 to provide independent oversight of IRS activities.

Employer shared responsibility background

In general, ALEs are businesses that had an average of at least 50 full-time employees, including full-time-equivalents, in the preceding calendar year. New employers determine their ACA status using their anticipated and actual employee count in the current year.

ALEs must report the health insurance coverage information they offered on a Form 1095-C for each full-time employee. These forms are all filed with a transmittal Form 1094-C. ALEs that sponsor self-insured health plans must report health coverage information for each individual enrolled on a Form 1095-C.

Under employer shared responsibility provisions, ALEs risk a potential assessment if they fail to offer adequate, affordable health insurance to their full-time employees and their dependents, and any of those employees receive a premium tax credit from a government marketplace. The IRS bases the proposed assessment on what the employer filed on forms 1094-C and 1095-C.

TIGTA’s findings

TIGTA's report identifies barriers in the processes to detect employers that should receive assessments under employer shared responsibility provisions. Issues include:

• Inaccurate and incomplete data;
• Inaccuracies developed during the processing of paper returns;
• Unclear instructions related to submitting returns in the proper format; and
• Other procedural issues.

TIGTA's recommendations to ALEs to improve processes include:

• Ensuring data are complete, current, and accurate;
• Making necessary enhancements to the IRS SCRIPS system to ensure accuracy when scanning forms 1094-C and 1095-C;
• Improving internal procedures related to processing paper forms; and
• Streamlining tax identification number validation efforts.

TIGTA's recommendations aim to ensure that the IRS uses efficient processes to gather the necessary data to identify employers potentially qualifying for ACA shared responsibility assessments and calculate those amounts. The IRS has agreed to TIGTA's recommendations. Employers should expect increased IRS attention to attaining pertinent data, and tightened processes and protocols for this purpose.

What does this mean for employers?

Keep in mind that for tax filing years 2015-2017, the IRS has given employers good-faith transition relief from penalties for incorrect or incomplete information on Forms 1094-C and 1095-C. Returns filed with incomplete or inaccurate information may trigger erroneous IRS proposed assessments, which may have resulted in some of the inaccuracies identified in the TIGTA report.

Inaccuracies or incomplete data may cause additional work for an employer. For example, a business may receive a proposed assessment notice if at least one of its full-time workers received a premium tax credit for a past filing year.

When this occurs, the employer must investigate what led to the proposed assessment and correct any errors discovered in the filing. This may require looking back years. In addition to making corrections, a business must respond to the formal process outlined in the 226-J letter. This arduous task calls for letters of explanation with reasonable evidence. A proposed assessment notice means an employer must do significantly more work than if it had filed accurately the first time.

React promptly to an assessment letter

Because the first couple of years of ACA tax filing requirements caused confusion for many employers, proposed assessments received may pertain to the healthcare law's earlier years. If you get one, ESR services are available to help you respond promptly and avoid more burdensome requirements in subsequent notices — and potentially a demand for payment.