Ordinarily under the Internal Revenue Code (Code), when a taxpayer files a return reporting tax liability (or absence thereof), the filing of the return triggers a period of time during which the IRS can challenge the reported tax liability. This period is referred to as a “statute of limitations” and the customary period under Section 6501(a) of the Code expires three years after the “return” is filed. As is explained below, a form must meet certain criteria to be considered a “return” that, once filed, starts the statute of limitations running.
The IRS Office of Chief Counsel has stated, in a memorandum dated December 26, 2019, that because there is no actual return filed reporting ACA taxes owed by Applicable Large Employers (ALEs) under Code Section 4980H, the statute of limitations on the IRS’s ability to collect the taxes never begins to run, even though ALEs annually file Form 1094-C transmittal forms with IRS each year, along with copies of Form 1095-C statements furnished to full-time employees (and part-time employees covered under self-insured group health plans). Therefore, ALEs remain potentially liable for Code Section 4980H excise taxes for an indefinite period. The IRS has been actively collecting ACA taxes from Applicable Large Employers owed for calendar years since 2015 and presumably will continue to do so. This significant amount of potential tax liability will only grow, not wear away, under the IRS stated policy.
Below we spell out how the IRS concluded that it has an open-ended ability to assess ACA penalties.
By way of background, the IRS uses the term “Employer Shared Responsibility Payments” or “ESRP” to refer to the excise tax imposed on Applicable Large Employers under Code § 4980H if they don’t meet their ACA duties to offer affordable, minimum value or higher coverage to full-time employees.
There are two different taxes:
- The 4980H(a) tax which applies if at least one full-time employee qualifies for premium tax credits on an exchange, and the employer fails to offer minimum essential coverage to at least 95% of its full time employees (or all but 5 of its full-time employees, if 5 is greater than 5%). This tax, currently set at $2,570 annually, is calculated by multiplying that amount times all full-time employees, minus the first 30. (The tax was $2,500 for 2019). Depending on the number of full-time employees, this tax can mount quickly.
- The 4980H(b) tax applies if the employer fails to offer affordable, minimum value or higher coverage to that employee. This tax, currently set at $3,860 annually, is calculated by multiplying that amount times only the number of those full-time employees who qualify for premium tax credits on the exchange. (The tax was $3,750 for 2019). This tax can never exceed in amount what the ALE would owe under the (a) tax if it did not offer minimum essential coverage.
It is important to note that Applicable Large Employers do not calculate or report ESRP amounts on corporate or other business tax returns or on any other type of “penalty” return, even though other types of excise taxes are reported on dedicated IRS forms (e.g., Form 5330, Return of Excise Taxes Related to Employee Benefit Plans).
Instead, ALEs annually file with the IRS Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, together with copies of the individual Form 1095-C Employer-Provided Offer and Coverage statements furnished to full-time employees. Using this information, the IRS determines which full-time employees might have triggered an ESRP each month in a given year based on the reported offer of coverage (or lack thereof), their employment status for the month, and, among other factors, the cost of coverage offered for the month. The IRS also receives reports from the exchanges (Form 1094-A Health Insurance Marketplace Statement) on advance payment of premium tax credits to individuals. By checking the employees’ Form 1040 returns, the IRS then determines, based on household income, which of those full-time employees were entitled to retain some or all of the premium tax credits advanced to them by the exchanges. Full-time employees’ retention of premium tax credits, teamed with the information reported on Forms 1094-C and 1095-C, triggers imposition of the ESRP on the Applicable Large Employer. The IRS notifies the ALE of its intention to assess ACA penalties via Letter 226-J, related forms, and subsequent correspondence.
Applicable Large Employers have advocated that Form 1094-C and attached employee statements are returns that, when filed, trigger the three-year statute of limitations under Code Section 6501. In its memorandum, the Office of Chief Counsel concludes that this is not the case, because the data disclosed on Forms 1094-C and 1095-C is insufficient to calculate tax liability – it only provides part of the information the IRS needs to calculate the tax, the rest of which is obtained from the exchanges, and from full-time employees’ tax returns. Disclosure of information that is sufficient to calculate tax liability is one of four criteria used to determine when a tax form, when filed, is sufficient to trigger the running of the statute of limitations, as set forth in Beard v. Commissioner, 82 Tax Court 766, 777 (1984), aff’d. 793 F.2d 139 (6th Cir. 1986).
Because the ACA forms do disclose sufficient information to calculate tax liability and thus do not trigger the “filed return” statute of limitations, any other applicable statute of limitations would have to be set forth by Congress in Section 4980H itself. Citing numerous federal cases holding that no statute of limitations may be imposed absent Congressional intent, and noting that Section 4980H contains no statute of limitations, the memorandum concludes that the Service is not subject to any limitations period for assessing Section 4980H payment.
What this means to Applicable Large Employers is that they now have an added incentive, in the form of minimizing open ended potential tax liability, to ensure that they are offering affordable, minimum value or higher coverage to their full-time employees for so long as the ACA’s ESRP provisions remain in place. They must also continue to timely and accurately file and furnish Forms 1094-C and 1095-C, respectively, as failing to do so triggers its own tax penalties, which were recently increased. However, because these Forms do not trigger running of any statute of limitations on collection of the underlying Section 4980H excise tax, there is no “value add” in ongoing ACA reporting compliance.
 The other criteria are that 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 above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.
Photo credit: Annie Spratt (Unsplash)