In our experience most employers receive error messages when they transmit their Affordable Care Act (ACA) information through the IRS's ACA Information Reporting (AIR) System. One of the most common reasons employers receive errors is because the name and tax identification number (TIN) or social security number (SSN) of an employee or dependent does not match the information in the IRS's database. These filing errors could trigger assessment of accuracy-related penalties, as they do with other IRS transmissions.

To help avoid or mitigate these potential penalties, employers should put in place a system that both minimizes name/TIN mismatch errors and also allows them to assert a "reasonable cause" defense if penalties are assessed (see Tax Alert 2022-1881).

IRS ACA AIR transmission acknowledgment reports

Most ACA information returns (Forms 1094-C and 1095-C) are filed electronically through the IRS's AIR system (beginning in 2024, employers that file 10 or more returns must use the AIR system). After filing, the AIR system issues an "acknowledgement report," which confirms the forms were received and identifies any errors, with the most common error, in our experience, being that an individual's name and SSN/TIN appears differently on an ACA information return than it does in the IRS database.

The IRS maintains several databases with an individual's name and TIN combination. It is unclear which database the agency uses when reviewing ACA transmissions. These IRS databases are not available for public review.

A name/TIN error message in the AIR System acknowledgement report is not an official notice of an accuracy-related penalty. The AIR System error message, however, indicates that the information provided is not consistent with the information the IRS uses in assessing ACA information. These "errors" could result in an accuracy-related penalty, as it does with other IRS information returns. Therefore, employers should consider taking the appropriate action to avoid triggering penalties.

Potential penalties and waivers

Applicable large employers (ALEs) under the ACA are subject to potential penalties for two types of accuracy-related issues: (1) failure to timely or accurately file information returns with the IRS (IRC Section 6721) and (2) failure to timely or accurately furnish information returns to payees (IRC Section 6722).

The penalty amount depends on whether the employer takes action to correct the error and when the action takes place. A penalty of $310 per form (for 2024) applies to employers that do not make corrections or make corrections after August 1 of the year in which the form was required to be filed. The penalty can rise to $630 per form (for 2024) for employers if the IRS determines that an employer is considered to have acted with "intentional disregard."

The IRS uses Notice 972CG to notify filers of proposed ACA penalties. The IRS may waive the penalties proposed in Notice 972CG if the employer can demonstrate the failure to file is due to reasonable cause, not willful neglect (IRC Section 6724). An employer can prove reasonable cause by demonstrating that it acted in a "responsible manner" and that the failure was due to significant mitigating factors or events. The IRC Section 6724 regulations outline a process that employers can use to demonstrate that they acted responsibly with respect to the requirement to report names and TINs accurately.

The AIR system acknowledgement report has become more important in recent years as the IRS no longer provides a "good faith waiver" from accuracy-related penalties, as it had in tax years 2015 through 2020. The removal of the good faith waiver could potentially allow the IRS to issue accuracy-related penalties on ACA reports as it does for other informational filings.

Response to AIR error message concerning employees

If an employer receives an AIR error message about the name/TIN mismatch of an employee, the IRC Section 6724 regulations outline a three-step approach for obtaining the required TIN that can be used to assert a reasonable cause defense. The employer should request the TIN:

1. When the individual enrolls in coverage
2. Within a reasonable period following receipt of the IRS notification of an incorrect TIN
3. By December 31 of the year following the year of notification

Employers should document their procedures generally and for the specific individuals listed on the AIR system acknowledgement report to help in asserting a reasonable cause defense in the event the IRS later issues an official Notice 972CG penalty assessment.

Response to AIR error message concerning dependents

To support an assertion that an employer took reasonable steps to obtain the required TIN after receiving an AIR notification of a name/TIN mismatch related to enrolled dependents, the employer could:

1. Ask the employee responsible for the dependent to confirm that the name/TIN combination is correct (if the dependent does not have a TIN, the employer can provide the dependent's date of birth)
2. Retransmit the form that includes the dependent with the date of birth in place of the TIN

Retransmitting a form that corrects a dependent error on or before the employer's filing deadline, including any extensions, will allow the employer to avoid accuracy-related penalties. If the employer transmits the corrected form after the filing deadline but on or before August 1 of the filing year, the penalty could be mitigated. If the employer transmits corrections after August 1 of the filing year, the employer will still be subject to the same maximum penalty as a failure to correct the error.

Implications

Now that the IRS is no longer giving employers good-faith relief for accuracy-related penalties, it is more important to put processes in place to show the IRS that the employer did its best to comply with the requirements. In the case of name/TIN mismatches, the IRS has given employers guidelines on how to show they have requested the information several times, which supports a reasonable-cause defense.

Employers should keep aware of AIR error messages and use the opportunity to review their processes and documentation to make sure they can assert this defense if penalties are triggered.