IRS Focus on Obamacare Enforcement Creates Pitfalls for Employers

Despite the layoffs and resignations at the IRS over the last several months, the agency has been actively enforcing the Affordable Care Act as it’s used by applicable large employers, known as ALEs—those with more than 50 full-time equivalent employees during the preceding year.

If the IRS contacts an ALE about noncompliance or an untimely filed form, speed is necessary to obtain the relevant information to avoid a penalty assessment—or to fight one.

ALEs have been required since 2015 to offer minimal essential coverage and file forms (1094-C and 1095-C) reporting offers of such coverage to full-time employees. ALEs that fail to do so and have an employee obtain coverage through an exchange (a website operated by the state or federal government to provide coverage) may be subject to a penalty.

This penalty is the employer-shared responsibility payment of $2,000 (indexed; $2,970 for 2024) multiplied by the number of full-time employees. ALEs also may face a $3,000 penalty ($4,460 for 2024) multiplied by the number of full-time employees who obtain coverage through an exchange despite the employer meeting the 95% requirement.

ALEs that fail to meet the reporting requirement are subject to similar penalties assessed for failing to file or furnish Forms 1098, 1099, and W-2. It’s common for the IRS to assume that an ALE failing to file appropriate forms also didn’t furnish forms to employees, triggering a second penalty per recipient.

Both the employer-shared responsibility payment and any information return penalties are assessable. They become an obligation owed to the IRS just like a tax, where the IRS may pursue enforced collection measures such as the issuance of liens and levies. ALEs have collection rights against these measures, which generally include the right to challenge the underlying liability.

However, ALEs and their professionals often encounter difficulties in making such challenges.

Sometimes, the notice of intent to levy (received by certified mail) is the first notification an ALE receives telling them that they’re liable, despite that the Internal Revenue Manual spells out a detailed process the IRS is supposed to follow before assessing such liability.

Once received, the notice only provides 30 days to respond. ALEs are often challenged to review their records and contact (and receive) information from the IRS that will help them understand whether they can even challenge the assessment, let alone develop the factual basis that will allow for a successful challenge.

These difficulties are even more prominent when an ALE now works with a different third-party payroll administrator or has had management or key employee turnover since the year relating to the assessment.

Congress enacted the Employer Reporting Improvement Act in December 2024, setting a six-year limit on assessing employer-shared responsibility payments for forms filed after Dec. 31, 2024. For forms filed before that date, the statute of limitations is less certain. Some tax practitioners believe that the general three-year statute of limitations applies.

An internal memorandum from the IRS suggests that its position is that Forms 1094-C and 1095-C aren’t “returns” because they don’t report any tax liability and, as such, there’s no statute of limitations for responsibility payments for periods before Dec. 31, 2024. It wouldn’t be surprising to see future litigation on this point.

ALEs are best served by complying with the Affordable Care Act requirements to both offer and report minimal essential coverage and retain proof for all periods within the assessment period. Some ALEs may wish to include records of offers of coverage and of timely filing as part of their permanent records in case an issue arises with the IRS, particularly for forms filed before Jan. 1, 2025.

Of course, the three-year statute of limitations doesn’t begin without filing, so ALEs should consider retaining proof of filing indefinitely to limit future exposure to information return penalty assessments, unless they’ve obtained recognition from the IRS that such forms have been received.

ALEs contacted by the IRS over filed forms should provide requested information promptly to limit the possibility of an assessment. For ALEs that have learned of an assessment, quick action is often required. They should consider working with experienced professionals who have dealt with similar issues to identify important information existing in their files and requesting appropriate information from the IRS to mount a challenge.

If these steps are taken, significant liabilities claimed by the IRS sometimes can be resolved for a fraction of the price of the underlying liability.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Brett Bissonnette leads Plante Moran’s tax controversy services practice and frequently represents clients before the IRS.

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