IRS AIR Errors: How Employers Can Avoid ACA Penalties

AIR on the side of caution—Pay attention to your AIR error messages

Author: Jacob M. Monty and Ana P. Elizondo

IRS AIR error codes have become a critical concern for employers filing ACA forms. Applicable large employers are required to offer their employees minimum healthcare coverage and comply with the reporting requirements of the Affordable Care Act. But on March 31, employers may have been surprised to receive a message regarding an IRS AIR error with respect to an employee’s name and Social Security number (SSN) after submitting their 1094-C or 1095-C information to the Internal Revenue Service (IRS). But what does this mean for employers, and are there any steps they should take to address these errors? Most definitely.

The error of ignoring IRS AIR messages

Affordable Care Act Information Returns (AIR) error codes are remitted to employers after they submit their employees’ 1095-C filing information to the IRS. Once you’ve submitted this tax information, you may see its filing status as “accepted with errors.” You’ll then be prompted to download an error message that contains the codes, or reasons, for why the filed information contains errors.

After receiving and reviewing the IRS AIR error message, you should review the message and determine the error as it pertains to an individual employee. The IRS may issue a variety of error codes. There may be one code in the message, however, that states an employee’s name and SSN don’t match the IRS’s records.

You should note that an IRS AIR error message is neither a penalty notice nor a requirement to solicit an employee’s SSN. There’s also no requirement to discharge the employee. However, you should be aware that these filing errors could trigger an assessment of accuracy related penalties from the IRS.

Reasonable cause defense

In the era of heightened immigration enforcement, you shouldn’t compound the problem by failing to follow IRS regulations in an area that sometimes correlates with undocumented workers. But if you receive an error message indicating an employee’s name and SSN don’t match the IRS’s records, you shouldn’t jump the gun and assume the employee is undocumented or unauthorized to work. Sometimes these errors are the result of simple typos or employees’ having changed their last name.

You should first verify that your records match the information reported to the IRS. After you confirm the information agrees with your records, you should take reasonable steps to avoid or mitigate potential penalties. You should also implement a procedure that allows you to assert a reasonable cause defense in the event the IRS does issue penalties.

To show a filing error was the result of reasonable cause and not willful neglect, you must show you acted in a responsible manner and either that there were significant mitigating factors with respect to the errors or that the errors were the result of events beyond your control.

Annual solicitations

Showing the errors were the result of events beyond your control, like the employee provided incorrect
information, will require additional evidence that you acted in a reasonable manner. You must show you solicited the correct information from employees at the start of their employment (the “initial solicitation”).

Employers make an initial solicitation by having employees complete a Form W-4. After receiving an AIR error code for mismatched information, you should make a second solicitation (also referred to as the first annual solicitation) by December 31 of that same year.

Bottom line

Many times, employers, especially larger ones, use third party payroll companies to process, file, and issue their tax statements, such as their W-2s; 1099s; Schedule K-1s; and, yes, their 1095-Cs. If you’re one of these employers, check with your payroll service provider and ensure you haven’t inadvertently neglected to address an AIR error message. Being proactive and engaging in these annual solicitations could help put you in a better position to assert the reasonable cause defense and save you hundreds, maybe thousands, of dollars in IRS penalties.

This article was originally written by Jacob M. Monty and Paty Elizondo for the Texas Employment Law Letter. Jacob Monty and Ana P. Elizondo are attorneys with Monty & Ramirez, LLP, in Houston and Dallas, respectively. You can reach them at jm****@*************aw.com and pe*******@*************aw.com.