7 Red Flags in IRS Penalty Audits Under the Affordable Care Act (ACA)

The Internal Revenue Service (IRS) is conducting penalty audits to enforce the Affordable Care Act’s (ACA) health insurance mandates for employers. These audits can expose employers to substantial penalties, so a strategic defense is critical. As Virginia IRS attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, building a strategic defense starts with understanding what (if anything) the IRS is likely to uncover during the audit process.

Potential Issues During IRS Penalty Audits Under the ACA

A variety of issues can present concerns for employers during IRS penalty audits under the ACA. For example, the following are all potential red flags for non-compliance:

1. Inconsistencies Across Tax Years

Inconsistencies across tax years, particularly with regard to the number of full-time employees (FTEs) or FTE equivalents claimed for ACA purposes, can raise concerns for revenue agents. While these inconsistencies can have valid explanations, revenue agents will typically err on the side of assuming non-compliance.

2. Inconsistencies with Other Filings

Inconsistencies with employers’ non-ACA-related filings can raise concerns for revenue agents as well. These include (but are by no means limited to) inconsistencies with the number of FTEs or FTE equivalents claimed under the Paycheck Protection Program (PPP) or the Employee Retention Credit (ERC) program.

3. Substantiation of FTE and FTE Equivalent Calculations

Employers must be prepared to substantiate their calculations of FTEs and FTE equivalents during IRS penalty audits under the ACA. If an employer cannot provide adequate substantiation, this will also be viewed as a red flag—and will almost certainly trigger further scrutiny.

4. Failure to Provide “Minimum Essential Coverage” or “Minimum Value”

Among several other specific and detailed requirements, the ACA obligates covered employers to provide both “minimum essential coverage” and “minimum value” to their employees. Concerns about the scope and quality of the coverage employers provide can lead to challenges during IRS penalty audits as well.

5. Failure to Meet the “Affordable” Coverage Requirements

The ACA also obligates covered employers to provide “affordable” coverage options to their employees. The “affordable” coverage threshold has changed from year to year, so employers that have not taken a proactive approach to managing ACA compliance could be at risk for unanticipated penalties.

6. Improperly Claiming ACA Tax Credits

While the ACA provides tax credits to eligible businesses, the eligibility criteria are strict, and employers claiming these credits must ensure that they calculate their credits correctly. Improperly claiming (or improperly calculating) ACA tax credits can trigger substantial liability.

7. Missing and Inaccurate Information Returns Under the ACA

Failing to file the information returns required under the ACA is another red flag for the IRS, as is submitting inaccurate information on a return. Even if a business has met its obligation to provide health insurance coverage, failing to satisfy its reporting obligations can still lead to adverse consequences.

Schedule a Confidential Consultation with Virginia IRS Attorney Kevin E. Thorn

Virginia IRS attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, represents employers in all ACA-related matters. If you have questions or concerns about facing scrutiny from the IRS, you can call 703-752-3752 or contact us online to schedule a confidential consultation.