The initial Forms 1094-C/1095-C filing season is finally behind us. Unfortunately, if you’ve discovered errors with the forms filed with the IRS or provided to employees, there may still be some lingering issues that should be addressed to avoid potential penalties.
Like other information returns filed annually with the IRS, late, incorrect or incomplete Forms 1094-C and 1095-C are subject to penalties under Code Sections 6721 and 6722. The IRS has repeatedly asserted that it will not impose penalties for the 2015 tax year for incorrect and incomplete Forms 1094-C and 1095-C provided that the employer can show it made a “good faith effort” to comply with the reporting requirements. No good faith relief is available to employers that fail to timely file or furnish the forms. Even for an employer that has failed to timely file or furnish Forms 1094-C and 1095-C, the IRS has stated that it may waive the applicable penalties if the employer can show “reasonable cause.” Establishing “good faith” and “reasonable cause” may require additional efforts prior to year-end to avoid a penalty for 2015.
Associated Penalties and Waivers
Code §6721 penalties arise for (1) failure to timely file an information return, (2) failure to include all required information, and (3) including incorrect information on a return. A separate and distinct penalty exists in Code §6722 for failure to provide an accurate statement to an individual (e.g., an employee or covered individual who receives a copy of the Form 1095-C). The amount of the penalty imposed under Section 6721, which is $260 per return, is the same as the penalty amount imposed under Section 6722, meaning that one incorrect Form 1095-C has the potential to generate a combined penalty of $520. The total penalty for all reporting failures under Section 6721 is capped at $3,178,500 per year per employer. The same cap applies to furnishing failures under Section 6722.
There are reduced penalties for timely correction of returns filed with the IRS. If a Form 1094-C or 1095-C filed electronically is corrected within 30 days of the required filing date, that is, if it is corrected by July 30, 2016 for 2015 filings, the penalty for each violation is reduced to $50 with a maximum penalty of $529,500 per employer. If corrected by August 1st (extended to November 1st for 2015 filings only), the penalty amount is reduced to $100 per return with a maximum penalty of $1,589,000 per employer.
There are also reduced penalties for timely correction of Forms 1095-C furnished to individuals. If corrected within 30 days after the date prescribed for furnishing the Form 1095-C, that is, if it is corrected by April 30, 2016 for 2015 forms, the penalty for each violation is reduced to $50 with a maximum penalty of $529,500 per employer. If corrected by August 1st (extended to October 1st for 2015 forms only), the penalty amount is reduced to $100 per form with a maximum penalty of $1,589,000 per employer.
The penalty caps are adjusted downward for small businesses with gross receipts of $5 million or less. Violations due to intentional disregard result in a $520 per return/statement penalty with no cap on the total amount owed.
Incorrect or Incomplete Filings and Good Faith Relief
For this initial filing year only, the IRS will not assess penalties with a showing of good faith. This relief relates solely to incorrect or incomplete filings or statements and not with respect to a failure to file a return or furnish a statement. Correcting errors is part of the good-faith effort to file and/or furnish accurate and complete information returns. The failure to correct inaccurate filings or statements may result in a loss of the good faith relief and the imposition of substantial penalties.
Late Filings and Reasonable Cause Waiver
Employers that missed the filing or furnishing deadline may be entitled to relief with a showing of reasonable cause under Code §6724. Reasonable cause is available where “the reporting entity demonstrates that it acted in a responsible manner and the failure is due to significant mitigating factors or events beyond the reporting entity’s control.” See Notice 2016-4.
Correction and Good Faith Relief
Filing errors come up in several ways including through the online submission process, by an error discovered by the employer itself, or as reported by an employee or covered individual to the plan sponsor. In order to take advantage of the good faith relief, employers with knowledge of such errors should take steps to correct them.
The 2015 Form 1094-C/1095-C Instructions provide that full correction requires a new filing with the IRS for each incorrectly filed Form 1095-C, as well as furnishing a copy of the corrected filing to the affected employee, unless the employer is eligible to use either the Qualifying Offer Method or the Qualifying Offer Method Transition Relief for 2015.1 Items requiring correction include incorrect or missing2:
Name, social security number, of an employee or covered individual
Employer identification number
Details on offer of coverage
Affordability safe harbor and other relief codes
Many employers experienced issues with these initial filings. Both the good faith relief and reasonable cause waivers for penalty relief are not automatic, and a failure to act could be costly. Plan sponsors should take steps to reduce or eliminate issues through the correction process.
© Boutwell Fay LLP 2016, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of September 30, 2016.