IRS Extends Due Date for Forms 1095-B and 1095-C Relating to Minimum Essential Coverage

In an early Christmas present for providers of minimum essential coverage and applicable large employers, the IRS released Notice 2018-06 today, extending the deadline for furnishing statements to individuals regarding insurance coverage provided to them for the 2017 tax year.  The deadline, which was January 31, 2018, is pushed back thirty days to March 2, 2018.  The notice also extends the good faith transition relief announced in Notices 2015-68 and 2015-87 (and extended by Notice 2016-70) to 2017 information returns.

Code sections 6055 and 6056 require providers of minimum essential coverage to file and furnish annual information returns and statements regarding the coverage they provide to both individuals and the IRS.  Providers furnish this information to individuals on Form 1095-B, “Health Coverage,” and Form 1095-C, “Employer Provided Health Insurance Offer and Coverage.”  Failure to timely furnish such forms subjects providers to penalties under Code sections 6721 and 6722.

After consulting with employers, insurers, and other providers, the IRS determined that additional time was needed for those entities to comply with certain minimum essential coverage reporting requirements.  Accordingly, the IRS granted the 30-day extension available under Treasury Regulation §§ 1.6055-1(g)(4)(i)(B)(1) and 301.6056-1(g)(1)(ii)(A) and will not impose certain penalties with respect to such forms if taxpayers demonstrate a good-faith effort to comply.  Notably, the extension only applies to the furnishing of such forms to individuals—it does not extend the filing deadline or provide penalty relief for forms required to be furnished to the IRS.  The deadline for filings the forms with the IRS is February 28, 2018, for paper filers and April 2, 2018, for electronic filers.  The notice provides similar relief to notices issued in prior years (e.g., Notice 2016-70 with respect to 2016 Forms 1095-B and 1095-C, discussed here), but the IRS cautions that no comparable relief is expected to be issued next year with respect to 2018 reporting.

This extension may require individuals to file their individual tax returns before receiving a Form 1095-B or 1095-C.  In such cases, Notice 2018-06 permits such individuals to rely on other information received from their employer or coverage provider for purposes of filing their returns.  As in earlier years, copies of Form 1095-B and 1095-C are not required to be filed with individual taxpayer returns.

IRS Extends Deadline for Furnishing ACA Statements to Individuals And Good-Faith Transition Relief

Today, the IRS in Notice 2016-70 extended the deadline for certain 2016 information reporting requirements under the Affordable Care Act (ACA), as employers and other coverage providers prepare for their second year of ACA reporting.   Specifically, providers of minimum essential coverage under Code section 6055 and applicable large employers under Code section 6056 will have until March 2, 2017—not January 31, 2017—to furnish to individuals the 2016 Form 1095-B (Health Coverage) and the 2016 Form 1095-C (Employer-Provided Health Insurance Offer and Coverage).  Because this extended deadline is available, the normal automatic and permissive 30-day extensions of time for furnishing ACA forms will not apply on top of the extended deadline.  Additionally, the Notice extended good-faith transition relief from penalties under Code sections 6721 and 6722 to 2016 ACA information reporting.

Filers should note that, unlike Notice 2016-4, which extended the deadlines for both furnishing to individual taxpayers and filing with the IRS the 2015 ACA forms, Notice 2016-70 did not extend the deadline for filing with the IRS the 2016 Forms 1094-B, 1095-B, 1094-C, and 1095-C—and this deadline remains to be February 28, 2017 (or March 31, 2017, if filing electronically).  Filers may apply for automatic extensions for filing ACA forms by submitting a Form 8809 and seek additional permissive extensions.  Late filers should still furnish and file ACA forms as soon as possible because the IRS will take into account this timing when determining whether to abate penalties for reasonable cause.

The extended furnishing deadline means that some individual taxpayers will not have received a Form 1095-B or Form 1095-C by the time they are ready to file their 2016 tax return.  The Notice provides that these taxpayers need not wait to receive these forms before filing their returns.  Instead, taxpayers may rely on other information received from their employer or other coverage provider for filing purposes, including determining the taxpayers’ eligibility for the premium tax credit and confirming that they received minimum essential coverage.

Notice 2016-70 also extended the good-faith transition relief for 2016 returns.  Specifically, filers that can show that they made good-faith efforts to comply with the ACA reporting requirements for 2016 are not subject to penalties under Code sections 6721 (penalties for late, incomplete, or incorrect filing with IRS) and 6722 (penalties for late, incomplete, or incorrect furnishing of statement to individual taxpayers).  This relief would apply to missing and inaccurate TINs and dates of birth, and other information required on the ACA form.  It does not apply where a filer does not make a good-faith effort to comply with the regulations or where the filer failed to file or furnish by the applicable deadlines.

IRS Pushes Bad Position in Penalty Case and Loses on Reasonable Cause Grounds

August 17, 2016 by  
Filed under IRS

The U.S. Tax Court recently held that an individual taxpayer was not liable for failure-to-file and failure-to-pay penalties under Code Sections 6651(a)(1) and 6651(a)(2), respectively, due to reasonable cause.  In Rogers v. Commissioner, a 2007 fire nearly destroyed Rogers’ home, resulting in losses exceeding $150,000 and essentially leaving her homeless.  Rogers did not deduct the losses on her 2007 or 2008 return, believing that she could claim the deduction only in the year the insurance company resolved her claim.  In 2009, the insurance company paid her $43,964, and she did not file an income tax return or pay the related taxes because she believed that her casualty losses (to the extent not compensated by insurance) fully offset her 2009 income.

The IRS disagreed with the timing of this deduction because a casualty loss is generally deductible in the year of the casualty.  Only if and to the extent a taxpayer has a reasonable prospect of insurance recovery, the deduction is deferred until it can be ascertained whether such reimbursement will be received.  Thus, Rogers should have deducted the casualty losses in 2007 or 2008, not in 2009.  Rogers and the IRS settled the deduction issue and litigated the penalties under Sections 6651(a)(1) and 6651(a)(2).

The Tax Court ruled that the taxpayer’s error was due to reasonable cause and not willful neglect for three key reasons.  First, Rogers had a significant compliance history hallmarked by timely filing and paying her federal income taxes, and “significant efforts to correctly prepare her income tax returns” by consulting tax books and articles and even the IRS.  Second, following the casualty, Rogers suffered personal hardships.  From 2007 through 2009, she suffered bouts of depression, experienced living conditions she found dehumanizing, and in 2009, fractured her skull after falling from a subway platform.  Third, Rogers’ error—deducting a loss in a year later than the correct year—was an error made in good faith and not a blatant tax avoidance technique.  Although the court did not explicitly mention the difficulty of applying the law as a factor, the court did highlight the murkiness of the issue: determining the year in which there was “no prospect of recovery from insurance.”

The reasonable cause exception exists because Congress recognized that even the most compliant taxpayers are not perfect.  Notwithstanding case law on penalties that is often viewed as unfavorable, taxpayers often prevail in penalty cases before IRS Appeals.  Although the taxpayer in Rogers was an individual, the case sheds light on why the IRS concedes penalty cases when businesses demonstrate a history of compliance and identify rational and understandable reasons for the errors at issue.  Reasonable cause exists when a taxpayer exercises “ordinary business care and prudence.”  Ordinary business care and prudence is determined based upon all the relevant facts and circumstances, and the burden of proof rests on the taxpayer.

Consistent with Rogers, taxpayers can elevate their chances for abatement by establishing a history of tax compliance.  Further, when things go awry, taxpayers should promptly take responsibility and correct the mistake, and then take steps to identify the cause of the failure and establish procedures to prevent a recurrence of the failure.  By taking swift action, the taxpayer increases the odds of overcoming its burden to show reasonable cause.

IRS Proposed Regulations Clarify College Tuition Reporting Requirements Following TPEA and PATH Act

The IRS released proposed regulations on July 29 to reflect changes made to the Form 1098-T reporting requirements by Congress as part of the Trade Preferences Extension Act of 2015 (TPEA) and the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).  The proposed regulations were issued in response to requests for additional guidance made by college financial officers and industry analysts.  The proposed regulations were published in the Federal Register today, and they will become effective on the date that final regulations are published.

Penalty Relief.  The proposed regulations amend the regulations under Section 6050S of the Internal Revenue Code to reflect new Section 6724(f) of the Code.  That provision was added by the TPEA and prohibits the IRS from imposing information reporting penalties under Sections 6721 and 6722 on educational institutions for failing to include a correct TIN on Form 1098-T if the educational institution certifies under penalty of perjury that it complies with the IRS’s rules governing TIN solicitations.  The applicable TIN solicitation rules are the same as under the existing regulations.  In general, if the educational institution does not have a record of the individual’s correct TIN, it must solicit the TIN on or before December 31 of each year during which it receives payments of qualified tuition and related expenses or makes reimbursements, refunds, or reductions of such amounts with respect to the individual.  If the individual does not provide his or her TIN upon request, the institution must file Form 1098-T without the TIN but with all other required information.

Reporting Exceptions.  The TPEA amended Section 25A of the Code so that a taxpayer may only claim an education credit if it receives a Form 1098-T from the educational institution that includes all of the required information, including the taxpayer’s TIN.  The proposed regulations amend the existing regulations under Section 6050S of the Code to eliminate a number of exceptions to the Form 1098-T reporting requirement that the IRS determined would frustrate the purpose of TPEA by depriving students of the Form 1098-T required to claim an education credit for which they may otherwise be eligible.  The current regulations under Section 6050S provide four exceptions to the Form 1098-T reporting requirement: (i) nonresident aliens, except upon request by the nonresident alien; (ii) individuals whose qualified tuition and related expenses are paid entirely with scholarships; (iii) individuals whose qualified tuition and related expenses are paid under a formal billing arrangement; and (iv) information with respect to courses for which no academic credit is awarded.  The proposed regulations maintain the exception related to courses for which no academic credit is awarded but eliminate the other three reporting exceptions.

New Reporting Requirement.  Additionally, the proposed regulations require educational institutions to report the number of months that a student was a full-time student during the calendar year on Form 1098-T.  The change is intended to help the IRS determine whether a parent properly claimed the student as a dependent, and therefore, properly claimed the credit for the student’s educational expenses.  For this purpose, one day during a month is treated as an entire month.

Amounts Reported.  In addition, the PATH Act requires educational institutions to report the amount of payments actually received for qualified tuition and related expenses on Form 1098-T, rather than simply the amount of payments billed.  This requirement is carried through to the proposed regulations, subject to the transition relief announced in IRS Announcement 2016-17 that allows educational institutions to report the amount billed for 2016, as explained in our earlier article.

To determine the amount of payments received for qualified tuition and related expenses, the proposed regulations instruct educational institutions to treat payments received during a calendar year as payments received for qualified tuition and related expenses up to the amount billed for such expenses, and any amount in excess of the amount billed as payments for other expenses.

IRS Clarifies Several Issues Related to Section 6055 Reporting in Proposed Regulations

On July 29, the IRS issued proposed regulations under Section 6055 that seek to clarify a number of issues raised by commenters in response to the original proposed regulations under Section 6055 and Notice 2015-68.  Filers may rely on the proposed regulations for calendar years ending after December 31, 2013, making them applicable at the option of filers for all years during which Forms 1095-B and Forms 1095-C were required to be filed.  In addition to the clarifications contained in the regulations themselves, the IRS’s comments in the preamble to the regulations provide additional helpful guidance to filers.  Ultimately, the proposed regulations are helpful but continue to overlook some areas where further binding guidance in regulations would be helpful.  Specific changes are discussed below:

Catastrophic Coverage.  Unlike other coverage purchased through an exchange, the proposed regulations implement the change announced in Notice 2015-68, requiring that insurers providing the coverage report it.  This change is effective for catastrophic coverage provided in 2017 and required to be reported in 2018.  Insurers are not required to report catastrophic coverage provided in 2016 (and otherwise required to be reported in 2017), although they are encouraged to do so on a voluntary basis.  A filer who voluntarily reports catastrophic coverage provided in 2016 is not subject to penalties on those returns.

Supplemental or Duplicative Coverage.  Consistent with Notice 2015-68, the proposed regulations simplify the rule contained in the final regulations relating to supplemental coverage. Under the proposed regulations, a reporting entity that during a month provides minimum essential coverage under more than one plan that it provides (such as an HRA and a high-deductible health plan) need only report coverage under one plan.

Truncated TINs.  Consistent with Notice 2015-68, the proposed regulations clarify that a filer may use a truncated TIN in place of the TIN of each covered individual, the responsible individual, and if applicable, the sponsoring employer’s EIN.

TIN Solicitation.  Responding to comments from Section 6055 filers, the proposed regulations clarify how the reasonable cause rules relating to TIN solicitation under Section 6724 apply to Section 6055.  The IRS acknowledged in the preamble, that the existing rules were difficult to apply outside of the financial context for which they were written.  The clarifications include:

  • Under Section 6724, a filer is required to make an initial TIN solicitation at the time an account is opened. Commenters had requested clarification regarding when an account is opened for purposes of applying the TIN solicitation rules to Section 6055.  The proposed regulations specify that the account is “opened” when the filer receives a substantially completed application for coverage, including an application to add an individual to existing coverage.  The application may be submitted either by the individual or on the individual’s behalf (for example, by an employer).  As a result, providers of minimum essential coverage who are required to report under Section 6055 should strongly consider changing their applications forms to include a request for TINs, if they have not already done so. (See the discussion of transition relief below for the treatment of coverage in effect before July 29, 2016.)
  • If the initial solicitation does not result in the receipt of a TIN for each covered individual and the responsible individual, the filer must make the first annual TIN solicitation within 75 days of such date, or in the case of retroactive coverage, within 75 days after the determination of retroactive coverage is made. The second annual solicitation must be made by December 31 of the following year.  (See the discussion of transition relief below for the treatment of coverage in effect before July 29, 2016.)
  • Under Section 6724, initial and first annual solicitations relate to failures on returns for the year in which the account is opened. In other words, to demonstrate reasonable cause for the year in which the account was opened, a filer must generally show that it made the initial and first annual solicitations.  In contrast, the second annual solicitation relates to failures on returns for all succeeding years.  Because the first return required under Section 6055 will often be required for a year after the year in which the account is “opened” (as described above), the proposed regulations provide that the initial and first annual solicitations relate to the first effective date of coverage for an individual.  The second annual solicitation relates to subsequent years.  The IRS did not discuss how these rules related to an individual who has been covered continuously since a date prior to the requirement to solicit a TIN from an individual.  Presumably, the initial and first annual solicitations will relate to the first year for which a Form 1095-B or Form 1095-C would have been required to be filed by the filer.  These changes generally relate only to the solicitation process for missing TINs and not the process for erroneous TINs.
  • An open question was whether a separate TIN solicitation was required to each covered individual on Form 1095-B or Form 1095-C. The proposed regulations provide that a filer may satisfy the TIN solicitation rules with respect to all covered individuals by sending a single TIN solicitation to the responsible individual.  This is welcome news and alleviates the concern about sending separate solicitations to children and other covered individuals.  However, the proposed regulations do not adopt commenters’ suggestion that if an individual is later added to existing coverage that prior annual TIN solicitations, if those solicitations were unsuccessful, made to the same responsible individual would satisfy the annual TIN solicitation requirement with respect to the new covered individual.  Instead, even though a filer may have made an initial and two annual solicitations to the responsible person, the addition of a new covered individual will require the filer to make a new series of solicitations with respect to the new individual’s TIN.
  • Although not addressed in the regulations, the preamble indicates that a filer may solicit TINs electronically consistent with the requirements in Publication 1586. The guidelines for electronic solicitations generally require an electronic system to (1) ensure the information received is the information sent, and document all occasions of user access that result in submission; (2) make it reasonably certain the person accessing the system and submitting the form is the person identified on the Form W-9; (3) provide the same information as the paper Form W-9; (4) require as the final entry in the submission, an electronic signature by the payee whose name is on the Form W-9 that authenticates and verifies the submission; and (5) be able to provide a hard copy of the electronic Form W-9 to the IRS if requested.  Although it is helpful to know that the IRS believes filers may make use of an electronic system for TIN solicitations like filers under other provisions of the Code, it would have been helpful for the IRS to update its outdated regulations under Section 6724 to specifically permit electronic TIN solicitations.  Ultimately, because Forms 1095-B and 1095-C do not report income that an individual may seek to avoid having reported by using an erroneous name/TIN combination, a less complicated means of electronic solicitation would have been appropriate in this case.

The preamble declines to make four changes requested by commenters:

  • First, the preamble declines to amend the regulations to clarify that a renewal application satisfies the requirements for annual solicitation. Instead, the preamble states that the provision of a renewal application that requests TINs for all covered individuals “satisfies the annual solicitation provisions” if it is sent by the deadline for those annual solicitations.  Although the rule stated in the preamble would be helpful, it is not the rule contained in the regulations.  The regulations under Section 6724 include detailed requirements for annual solicitations including that they include certain statements, a return envelope, and a Form W-9.  Accordingly, a renewal application is unlikely, on its own, to satisfy the annual solicitation requirements as stated in the preamble.  Commenters had requested some changes to these rules, but as discussed below, the IRS declined to adopt such changes in the proposed regulations.
  • Second, the proposed regulations do not remove the requirement to include a Form W-9 or substitute form in a mailed annual solicitation. The preamble indicates that this change was not needed because filers are already permitted to include a substitute Form W-9 with a TIN solicitation.  Although this is true, it sidesteps the concerns raised by commenters relating to the inappropriateness of a Form W-9.  The preamble indicates that an application or renewal application would be an acceptable substitute.  However, the IRS drafters do not seem to understand what constitutes a substitute Form W-9  because an application under the new proposed rule would have to meet several requirements that such documents are unlikely to meet.  For example, a substitute Form W-9 must include a statement under penalties of perjury that the payee is not subject to backup withholding due to a failure to report interest and dividend income and the FATCA code entered on the form indicating that the payee is exempt from FATCA reporting is correct.  Neither of these certifications is relevant to Section 6055 reporting.  Moreover, the references to a “payee” is confusing in the context of Section 6055 reporting, which does not involve a payee (and to the extent there is a payee at all, it would be the filer).  The reference to FATCA exemptions is also not relevant, especially given that only individuals would be completing the form and no U.S. person is exempt from FATCA reporting even if it were relevant.  Moreover, because an application would likely require the applicant to agree to provisions unrelated to these required certifications (such as their age being correct, gender being correct, and other information on the application being correct), a separate signature block or conspicuous statement that the IRS requires only that they consent to the certifications required to avoid backup withholding would have to be included on the form.  It seems doubtful that any applications would satisfy these requirements currently.  Given the misleading nature of the statements and the simple fact that the discussion of backup withholding is completely irrelevant to Section 6055 reporting, it even seems doubtful that many filers will redesign their application forms to satisfy the substitute form requirements even though the drafters of the proposed regulations seem to believe that such forms would be acceptable substitutes.
  • Third, the proposed regulations do not remove the requirement that a mailed TIN solicitation include a return envelope. While retaining the rule in the existing Section 6724 regulations, the preamble does, however, clarify that only a single envelope is required to be sent consistent with the decision to allow a single TIN solicitation to the responsible individual to satisfy the TIN solicitation requirement for all covered individuals.
  • Fourth, commenters had requested that the IRS adopt rules specifically permitting filers to rely on the sponsors of insured group health plans to solicit TINs from their employees on the filer’s behalf. Although the IRS indicated that a filer may use an employer as an agent for TIN solicitation, it declined to provide a distinct ground for reasonable cause when the filer contracted with the employer-sponsor to perform the TIN solicitations.  As a result, the employer’s failure to satisfy the TIN solicitation requirements will leave a filer subject to potential penalties.

Transition Relief. The preamble provides that if an individual was enrolled in coverage on any day before July 29, 2016, the account is considered opened on July 29, 2016. Accordingly, reporting entities have satisfied the requirement for the initial solicitation with respect to already enrolled individuals so long as they requested enrollee TINs at any time before July 29, 2016.

As discussed above, the deadlines for the first and second annual solicitations are set by reference to the date the account is opened.  Accordingly, the first annual solicitation with respect to an individual enrolled in coverage before July 29, 2016, should be made at a reasonable time after that date (the date on which such account is considered open) consistent with Notice 2015-68. Accordingly, a filer that makes the first annual solicitation within 75 days of July 29, 2016 (by October 12, 2016), will be treated as having made such solicitation within a reasonable time.

The preamble states that filers that have not made the initial solicitation before July 29, 2016, should comply with the first annual solicitation requirement by making a solicitation within a reasonable time of July 29, 2016. The preamble reiterates that as provided in Notice 2015-68, a filer is deemed to have satisfied the initial, first annual, and second annual solicitations for an individual whose coverage was terminated prior to September 17, 2015, and taxpayers may continue to rely on this rule as well.  Because a filer is not required to make an annual solicitation under Section 6724 during a year for which it is not required to report coverage, presumably, a filer need not make any solicitations with respect to an individual for whom coverage was terminated at any time in 2015.

AIR System Messages.  The preamble to the proposed regulations formalizes the position of the IRS with respect to TIN mismatch messages generated by the ACA Information Returns (AIR) filing system.  In a footnote, the preamble states that such error messages are “neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer must solicit a TIN in response to the error message.”  However, given the IRS’s stated position that error correction is a necessary part of demonstrating “good faith” required for penalty relief, it is unclear what, if anything, a filer should do in response to these error messages.  In any event, filers may wish to demonstrate good faith by making an effort to obtain correct TINs from responsible individuals and head-off future errors by working to do so now, rather than later, when such efforts will likely be required.