The IRS Cavity Search… Want one?
“We’re auditing your tax return and we need documentation to verify the income and withholding you reported on your tax return.”
Ever get a letter like this? If so, I bet it ruined your day.
If not, get ready. IRS audits are about to become a lot more commonplace for business owners in the next few years, especially if you are a large employer whose employees get insurance on the exchanges.
Here’s how the new Insurance Exchanges, or “Marketplaces,” will trigger IRS audits for thousands of businesses across America:
- Your employee applies for insurance on the exchange and answers questions about his income and whether or not you offered him coverage.
- Your employee tells the exchange you did not offer him coverage and he meets the income guidelines to qualify for a subsidy or tax credit.
- The exchange is supposed to contact you to verify your employee’s eligibility. Given how well the feds did with the healthcare.gov rollout however, the odds of you being struck by lightning while being eaten by a shark that just won the lottery are probably better than this being a seamless or timely process.
- More likely than not, your employee will receive his subsidy or tax credit. Then later, if the IRS learns that you did in fact offer him qualified health insurance or he was otherwise not eligible, he will be required to pay back the subsidy he received out of his tax return.
- This simple misunderstanding creates far more of a nightmare for you. One of your employees receiving a subsidy or tax credit makes you a target for an IRS audit the purpose of which will be to determine how much you owe in penalties for failing to satisfy the Employer Mandate. If you did in fact offer qualified insurance, you better be prepared to prove it.
This is just one of many messes in which we anticipate employers will step next year. It is also why I am recommending that every employer maintain electronic records showing that they offered qualified insurance and that the employee declined coverage.
Many people do not realize that it will take a minimum of 18 months to two years before the IRS will have the information necessary to perform an ACA compliance audit. This means if you are incurring penalties, you may not even realize it until you have been incurring them for two years. The penalties I’m talking about could be as high as $2,000 per every full-time employee or $100 per employee per day.
ACA compliance is not as difficult as people think. It is definitely not as difficult as writing a big fat check to the IRS or having the IRS start digging into other areas of your business.
The time to plan is running out. Soon we will be advising employers on how to negotiate payments to the IRS. How much will that suck if that is you and you could have avoided them in the first place?