What if you get audited by I.R.S.?

Audit

What the I.R.S. looks for and why.

“Audit” is a word that can strike fear into the hearts of taxpayers.

However, the changes of an Internal Revenue Service audit aren’t that high. In 2017, the I.R.S. audited 0.5% of all individual tax returns. *

Being audited does not necessarily imply that the I.R.S. suspects wrongdoing. The I.R.S. says that an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verity that the information itself is accurate.

The I.R.S. selects returns for audit using three main methods.

Random Selection. Some returns are chosen at random based on the results of a statistical formula.

Information Matching. The I.R.S. compares reports from payers-W-2 forms from employers, 1099 forms from banks and brokerages, and others- to the returns filed by taxpayers.  Those that don’t match may be examined further.

Related Examinations. Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination.

There are a number of sound tax practices that may reduce the chances of an audit.

Provide Complete Information. Among the most commonly overlooked information is missing Social Security numbers – including those for any dependent children and ex-spouses.

Avoid Math Errors. When the I.R.S. receives a return that contains math errors, it assesses the error and sends a notice without following its normal deficiency procedures.

Match Your Statements. The numbers on any W-2 and 1099 forms must match the returns to which they are tied.  Those that don’t match may be flagged for an audit.

Don’t Repeat Mistakes. The I.R.S. remembers those returns it has audited.  It may check to make sure past errors aren’t repeated.

Keep Complete Records. This won’t reduce the chance of an audit, but it potentially may make it much easier to comply with I.R.S. requests for documentation.

Remember, the information in this material is not intended as tax or legal advice.  It may not be used for the purpose of avoiding any federal tax penalties.  Please consult legal or tax professionals for specific information regarding your individual situation.

Citations.

*irs.gov/statistics/enforcement-examinations [1/30/19]

ACA 2019 Affordability Standard and Out of Pocket Maximums

On May 21, the IRS announced in Revenue Procedure 2018-34 the 2019 shared-responsibility affordability percentage. Based on the ACA’s affordability standard as adjusted for inflation, health coverage will satisfy the requirement to be affordable if the lowest-cost self-only coverage option available to employees does not exceed 9.86 percent of an employee’s household income, up from 9.56 percent in 2018.

For 2019 calendar-year plans using the federal poverty level (FPL) safe harbor to determine affordability, an employee’s premium payment can’t exceed $99.75 per month, up from $96.08 per month in 2018.

The affordability standard is the highest percentage of household income an employee can be required to pay for monthly plan premiums, based on the least-expensive employer-sponsored plan offered that meets the ACA’s minimum essential coverage requirements. Eligible Large Employers need to cautious and ensure that they offer at least one plan that meets this standard.

Non-grandfathered group health plans must comply with an annual limit on cost-sharing, known as an out-of-pocket (OOP) maximum, which is set by the Department of Health and Human Services (HHS). This limit takes into account an employee’s spending under the plan deductible, as well as co-payments and percentage-of-cost co-sharing payments, but not plan premiums.  Last December, HHS announced that for the 2019 plan year, the OOP maximum will be $7,900 for self-only coverage and $15,800 for family coverage. In addition, the self-only is applied to each covered individual, whether the individual is enrolled in self-only coverage or family coverage.

The IRS annually sets a separate and lower OOP maximum exclusively for high-deductible health plans (HDHPs) that can be coupled with health savings accounts (HSAs), known as HSA-qualified HDHPs. The limits for the 2019 HDHPs OOP for self only coverage is $6,750 and $13,500 for family coverage.

 

Related SHRM Article:
2019 HSA Limits Rise, IRS Says, SHRM online Benefits, May 2018

More from the IRS

The hits just keep on coming.   Latest news from the IRS this week is concerning ACA enforcement even though Washington is busy trying to dismantle the machine. The IRS warns us that although the employee mandate is not being enforced in 2018 for 2017 violations, the employer mandate is still in force and is actively being enforce until 2019 tax year.  Currently the Service has about 32,000 violation notices for 2017 tax year sent out and in various stages of collection enforcement. Some assessments are over $1.2 million! This applies to companies with over 50 employees.

The penalties for not offering an ACA compliant plan, resulting in employees applying and being approved by the Marketplace, are serious indeed. Employees who have received subsidies under ACA through Marketplace vendors, can cost your company as much $2,000 in fines, per employee. Contact your accountant to make sure you have filled out your ACA forms and make sure you don’t have any employees currently enrolled in the Marketplace, because they thought it was a choice offered to them.

Why you should open letters from the IRS

It’s that time of year when the IRS starts rumbling again. But April 15 is the least of your problems if you have more than 50 employees, and get a certain IRS letter called the 226J.

If you open your IRS letter and it says Letter 226J in it, call your accountant immediately. This is the form that says that, according to the IRS, you did not comply with the ACA employer mandate requirements for the 2015 tax year.

You are responsible for offering ACA compliant coverage to your employees at a reasonable cost, compared to the wages of your lowest paid full time worker. If you did not offer affordable coverage to an eligible worker, and that worker instead buys his insurance on the healthcare exchange, you will be fined.

What this means is that one or more of your employees disregarded your employee health plan and signed up instead for a healthcare exchange plan. Those people may have qualified for a subsidy to help pay for their premiums, and Uncle Sam picked up the tab. And they’re sending you a demand letter for your failure to provide insurance along with penalties and interest.

You have 30 days from the date on the letter to respond to the IRS with your defense. Otherwise the IRS will assume that their numbers are correct and formally assess you and start collection activity.

If you have been cited in a Letter 226J, set out immediately to discover any errors or misstatements. And for heaven’s sake if you have not filed for tax year 2015, 2016 or
2017, submit filings immediately to minimize any further penalties. This is serious, and all the talk about “Obamacare is being dismantled”, or “the IRS is not auditing as much”, is just so much talk. The Service has full authority to pursue any company with 50 or more full-time or equivalent employees.

Form 1095 Information

The Affordable Care Act (ACA) added two employer reporting requirements to the Internal Revenue Code (Code), which will take effect for 2015 reporting:

  • Code § 6056 requires applicable large employers (ALEs) to provide an annual statement to each full-time employee detailing the employer’s health coverage offer (or lack of offer).
  • Code § 6055 requires employers (any size) that provide minimum essential coverage (MEC) under a self-funded (self-insured) plan to provide an annual statement to covered employees and former employees (including information about covered dependents).

The IRS has issued Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, for ALEs to satisfy the reporting requirement under Code § 6056. If the employer self-funds its plan(s), the employer also will use Form 1095-C to satisfy the additional requirement under Code § 6055.

The IRS has created two sets of codes in order to provide employers with a consistent way to describe their offers of health coverage. Each code indicates a different scenario regarding an offer of coverage, or explains why an employer should not be subject to a penalty for a particular employee, for a given month.

  • Code Series 1 is used for Line 14 of Form 1095-C and addresses:
    • Whether an individual was offered coverage.
    • What type of coverage was offered.
    • Which months that coverage was offered.
  • Code Series 2 is used for Line 16 of Form 1095-C and addresses:
    • Whether the individual was employed and, if so, whether he or she was full time or part time.
    • Whether the employee was enrolled in coverage.
    • Whether the employer is eligible for transition relief as an employer with a non-calendar year plan or as a contributor to a union health plan.
    • Whether coverage was affordable and, if so, based on which IRS safe harbor.

The list that follows provides an overview of the codes, with descriptions, a brief explanation of when the code should be used, and a clarification of what the effect of choosing a particular code may be.

You can also access the full list of codes, along with descriptions, in the instructions for Form 1095-C.

Form 1095 Cheat Sheet