January 2, 2015 by Tony Novak
We are now less than three weeks from the opening of tax filing season. New ACA tax penalty laws are in effect for 2014 business tax returns. IRS and DOL have taken many steps to educate taxpayers but confusion still reigns. At this point what do we know and what don’t we know about the new tax penalties under the new Section 4980D of the tax code that was triggered by the Affordable Care Act? This is an evolving topic; this blog post expands upon an earlier post that considered the new tax penalties.
What we know
1. The penalties became effective January 1, 2014 and many of the first effected small business tax returns will be filed in early 2015.
2. Penalties are self-reported.
3. There are two level penalties: a very severe level and a lesser level for unintentional violations.
4. The larger “$100 per employee per day” penalty could financially cripple or bankrupt some small businesses if enforced. (IRS writes about the penalty as $36,500 per employee per year of noncompliance).
5. The smaller “10% of employer contribution” tax penalty is more of an annoyance.
6. IRS is aware that some health insurance industry product promoters are disseminating incorrect information about the law and the new penalties.
What I presume
1. Many small businesses (perhaps hundreds of thousands or perhaps more than a million nationwide) could be subject to these new tax penalties. See my December 13, 2014 article “Top 5 Mistakes Small Businesses Make in Response to the Affordable Care Act” for some of the triggering behavior. The largest trigger by far seems to be employer payments for individual health insurance other than allowed by narrow exception.
2. Businesses that don’t know they are in violation of 4980D are simply postponing the tax penalty to a future date.
3. Self-correction is eventually required, especially if the taxpayer wants to claim the lesser penalty.
4. That the availability of the lesser penalty makes it less likely that a taxpayer would escape penalty completely.
5. Tax return preparers do not have a solid understanding of this issue. I suspect many think that the law does not apply to small firms. I also suspect that some confuse this portion of law with 4980H that deals with shared employer responsibility.
6. Tax filing software is still evolving in this specific are of compliance and its ability to “catch” the penalty for 2014 is questionable, especially if the preparer or filer is unfamiliar with employee benefit plan law.
What we don’t know
1. Whether any provision of this tax law provision that allow a taxpayer to escape penalty completely apply in this situation.
2. Whether politics will play a role in the will to enforce tax penalties against so many small businesses in the future.
3. Whether ignorance of the law, or in this case reliance on misinformation from a firm known to be providing false information, is basis for leniency for the business taxpayer.
4. Whether delaying updates in employee benefit plans “sets a tax penalty trap” for business owners and preparers who want to avoid the more severe tax penalty. IRS Handbook on penalty enforcement says “Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s non-compliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time. (The IRS Handbook was updated in August 2014 but includes no mention of ACA or the new penalty laws). In other words, what will happen if a filer of tax representative claim the lesser penalty while the benefit plan itself is still out of compliance? The documentation of knowledge of violation (in asking for the lesser penalty) while continuing to violate the law may provide the basis for enforcement of the more severe penalty.
5. How long the time period will extend to assert the unintentional violation defense. Back in April 2014 one lawyer wrote: “Presumably, an employer that first became aware of a violation in, say, 2014, would be able to qualify for a waiver based on reasonable cause. Whether the result would be the same in, say, 2018, is less than clear”. Considering the more recent publications in late 2014 by IRS and DOL on this specific issue, I wonder if an attorney would have the same opinion today?