Ambiguity Resolved!
I recently caught up with a knowledgeable person at the IRS regarding an employer’s solicitation obligations for an incorrect taxpayer identification number (TIN). A great many employers who submitted Forms 1095-C received an AIRTN500 error message for at least one Form 1095-C. Certain employers received the AIRTN500 error message on 10 to 15 percent of the Forms 1095-C submitted to the IRS. This presented the apparent and daunting task of soliciting hundreds, if not thousands, of TINs following the procedures discussed in the regulations at section 301.6724-1. (This is due to conflicting views promoted by various pieces of IRS guidance, discussed in part 1 of this series.) However, the IRS has informed this author that no solicitation effort is triggered by an AIRTN500 error message for an incorrect TIN. (Yes, I know the preceding sentence is the single greatest sentence I have written regarding the TIN solicitation process!)
For employers who are rather risk averse and do not want to rely solely on the verbal representations of an IRS representative, I'll spend the rest of this post discussing the confusion surrounding the TIN solicitation issue.
If You'd Rather Wait for Formal IRS Guidance...
The Ambiguity Explained
As discussed in part 1 of this series, footnote 2 to the recently proposed employer reporting regulations indicates that the AIRTN500 error message is neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer solicit a TIN in response to the error message. According to my IRS source, this footnote is the controlling statement with regard to an employer’s responsibility in the event an employer receives an AIRTN500 error message for an incorrect TIN.
However, as I wrote in part 1, footnote 2 appears to be at odds with an employer’s general obligation to file a corrected return. The instructions to the Form 1094-C/1095-C state, “If you fail to file correct information returns or fail to furnish a correct recipient statement, you may be subject to a penalty. Regulations section 301.6724-1 (relating to information return penalties) does not require you to file corrected returns for missing or incorrect TINs if you meet the reasonable cause standard.” This statement on its face appears to confirm footnote 2. However, the details of the actual regulations contained in section 301.6724-1 make this statement in the Form 1094-C/1095-C instructions extremely confusing, if not altogether contradictory. Let’s examine the details of the regulations.
The regulations begin by stating that the penalties under section 6721 and section 6722 will be waived if the employer’s failure was due to reasonable cause and is not due to willful neglect (see section 301.6724-1(a)(1)). An employer satisfies the reasonable cause standard if there are significant mitigating factors as described in section 301.6724-1(b) or the failure arose from events beyond the employer’s control as described in section 301.6724-1(c). Additionally, to meet the reasonable cause standard an employer must establish that it acted in a responsible manner as described in section 301.6724-1(d) both before and after the failure related to the reporting (see section 301.6724-1(a)(2), flush language).
To establish significant mitigating factors, one of the two alternatives for meeting the reasonable cause standard, the regulations state the employer must, among other things, satisfy paragraph (d) of this section (see section 301.6724-1(b)). Similarly, for an employer to establish the failure arose from events beyond the employer’s control, the other of the two alternatives for meeting the reasonable cause standard, the employer must, among other things, satisfy paragraph (d) of this section (see section 301.6724-1(c)). So either way, an employer must comply with section 301.6724-1(d).
Section 301.6724-1(d)(1)(ii) states that for an employer to meet the standards of the regulations it must undertake significant steps to avoid or mitigate the failure, including where applicable:
- Requesting, appropriate extensions of time to file, when practicable, in order to avoid the failure;
- Attempting to prevent an impediment or a failure, if it was foreseeable,
- Acting to remove an impediment or the cause of the failure, once it occurred, and
- Rectifying the failure as promptly as possible once the impediment was removed or the failure was discovered.
It is certainly a logical interpretation that for an employer to fulfill its obligations under section 301.6724-1(d)(1)(ii) that some course of action would need to be taken to update an incorrect TIN. The AIRTN500 error message is putting an employer on notice that a Form 1095-C has an incorrect TIN. However, footnote 2 of the proposed regulations and the IRS indicate that the employer does not need to make any sort of solicitation effort as a result of an AIRTN500 error message. This is not an intuitive interpretation.
The regulations further state that for an employer to satisfy the reasonable cause requirement of section 301.6724-1(c)(1) due to the actions of another person (in this case, the employee providing a TIN) the employer would have to show it acted in good faith in relying on the TIN provided by the employee (see section 301.6724-1(c)(6)). The regulations state that this standard will be satisfied for an incorrect TIN if the employer follows the procedures for an incorrect TIN set out in section 301.6724-1(f) (see section 301.6724-1(d)(2)). The requirements of section 301.6724-1(d)(2) require an initial solicitation which would have already been made and produced the incorrect TIN. There would then need to be up to two additional solicitations to try to determine the correct TIN (see section 301.6724-1(f)(ii) and section 301.6724-1(f)(iii)).
The annual solicitations are only required if the employer is notified by the IRS that the TIN is incorrect (see section 301.6724-1(f)(i)). Many people (and my conservative view would concur) interpreted the AIRTN500 error message to be such a notification from the IRS. After all, an AIRTN500 error message is a notice and it is from the IRS, the two criteria discussed in the current regulations. However, and fortunately, the IRS is taking the position that an AIRTN500 error message is not a notification that triggers any solicitation obligation under section 301.6724-1. An employer will only have to fulfill the solicitation obligations discussed in section 301.6724-1 if it receives a Notice 972CG or a more formal notice from the IRS.
Concluding Thoughts
An employer will still have to fulfill its solicitation obligations for missing TINs discussed in the previous article. The regulations are clear that a TIN is considered missing if it does not contain nine digits or includes one or more alpha characters (a character or symbol other than an Arabic numeral) as one of the nine digits (see section 301.6724-1(e)(1)). A TIN will likely be considered missing by the IRS if it is obviously incorrect such as repeating digits or ascending or descending digits. If this is the case, the missing TIN solicitation procedures discussed in the proposed regulations should be followed.
While there has been a lot of confusion regarding what an employer needs to do when it receives an AIRTN500 error message, the IRS’ position is the AIRTN500 error message creates no solicitation obligation for the employer. One of the companies I work with is a 1095 filing vendor (Accord), and it has promised the IRS official with whom I had this discussion that Accord would formally comment on the proposed regulations with the hope that the final regulations will clarify this issue. I expect these regulations to be finalized by the conclusion of the year. If you want to continue to take the conservative route, there is nothing wrong with following the solicitation procedures outlined in section 301.6724-1. However, it is apparently not necessary in the IRS’ view.