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In Chief Counsel Memorandum 20200801F (CCM), the IRS concluded that no statute of limitations applies to assessing the employer shared responsibility payment (ESRP) under IRC Section 4980H.

In support of its conclusion, the IRS noted that ESRP liability cannot be determined using tax returns filed by an applicable large employer (ALE) because no return contains all the data needed to calculate the ESRP. As a result, filing the returns to comply with IRC Section 4980H does not start the running of the three-year statute of limitations period.

Background

Under IRC Section 4980H, employers can be responsible for one of two payments for any given month: (1) when an ALE fails to offer full-time employees essential minimum coverage, and (2) when ALEs offer full-time employees essential minimum coverage that is unaffordable. In both cases, an ESRP is only triggered when a full-time employee enrolls in coverage through a state-provided health care marketplace qualifying for premium support in the form of a premium tax credit (PTC) under IRC Section 36B.

For an ALE that fails to offer minimum essential coverage to at least 95% of its full-time employees in any month, the ESRP is determined based on the total number of the ALE's full-time employees in that month. For an ALE that offers unaffordable insurance, the ESRP is based on the number of full-time employees who are certified as qualified for the PTC. As such, the ESRP for those employers cannot be determined until there is an exact count of how many employees are entitled to the PTC.

For the IRS to determine if any and how many full-time employees received a PTC, the agency must cross-reference (1) Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Forms 1095-C, Employer Provided Health Insurance Offer and Coverage (which an ALE must file for each of its full-time employees), with (2) Forms 1040 (filed by the full-time employees). The IRS then calculates the potential ESRP liability and sends Letter 226-J to the ALE, proposing the assessment.

The IRS said, "Even though there is no return that can be filed by an ALE to report and pay a determined liability under [IRC S]ection 4980H, ALE taxpayers have claimed that the filing of required information returns is sufficient to start the statute of limitations under [IRC S]ection 6501(a)."

IRS's reasoning

Under IRC Section 6501, taxes must generally be assessed within three years after a return is filed. IRC Section 4980H does not have a separate limitations period.

The IRS applied the test in Beard v. Commissioner¹ to determine if the return filed by the ALEs was enough to start the statute of limitations running. Under this test:

• There must be sufficient data to calculate tax liability
• The document must purport to be a return
• There must be an honest and reasonable attempt to satisfy the requirements of the tax law
• The taxpayer must execute the return under penalties of perjury

The IRS concluded that the returns filed by the ALEs under IRC Section 4980H do not satisfy the first requirement of the Beard test because "they do not contain sufficient data to calculate the liability" and, therefore, do not start the running of the limitations period. There is insufficient information to determine liability because the IRS must also look to the Form 1040s filed by full-time employees, not just the employers' returns. When the ALE files the Forms 1094-C and 1095-C, it generally does not know whether its full-time employees are eligible for the PTC, whether it is liable for payments under IRC Section 4980H, or how much those payments would be.

Implications

This CCM will allow the IRS to seek ESRPs indefinitely. To date, the IRS has systematically reviewed the tax returns and processed the ESRP assessments year-by-year, sending out the first Letters 226-J in November 2017 for 2015, the initial year IRC Section 4980H was effective. As of the date of this Alert, the IRS is sending out Letters 226-J for the 2017 calendar-year-proposed ESRP assessments.

While it seems unlikely that the IRS would revisit assessments for earlier years given its current practices, this CCM seems to open that possibility. We are unaware of any additional IRS examination activity concerning Forms 1094-C and 1095-C and ESRP liability in general, but this CCM means that the door might never close on those assessments. Depending on the facts and circumstances of the employer's situation, this ruling could raise questions about the timing of when an employer might be able to release a liability it established for any potential ESRP liabilities based on the accounting guidance in ASC 450, Contingencies. In addition, an employer that previously released a liability based on an expiring statute of limitations may need to consider if it now needs to reestablish this contingent liability.

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ENDNOTE

¹ 82 T.C. 766, 777 (1984), aff'd 793 F.2d 139 (6th Cir, 1986).