How should a tax preparer handle suspected ACA penalties for small businesses?
This post is inspired by the recent frustration expressed by an accountant who is a Facebook friend. My friend commented on one of my posts that even after a substantial investment of his time to learn and apply provisions of the Affordable Care act, he is still “beyond confused”. After reading a post about one IRS form required by some small businesses this year. exclaimed “This form is completely ridiculous! ” I don’t disagree, but I always return to the position that as tax professionals we must deal with the law as it exists, not as we think it should be.
The common scenario
Imagine that it is April 1, 2016 and you are in the heat of tax season preparing 2015 returns. A small business client comes in to your office. This small business has only two employees besides the owner and modest tax liabilities. The husband owns the business and the wife is an employee. They use a part-time office assistant. You are aware of the new ACA tax rules but since this client does not sponsor their own health plan, this should not be an issue, right? As you look at the 2015 business records and engage in the usual fact-finding conversation it becomes evident:
The business pays a bit each month to the employee for the cost of her health insurance coverage under her spouse’s employer-sponsored health plan. This seems smart because the cost is less than if your client sponsored their own health plan. Your client wants to know how to report this for tax purposes.
Since the wife is an employee, they reimburse the cost of family out-of-pocket medical expenses though their health reimbursement arrangement that an insurance broker helped set up years ago. After all, the client reminds you, that tax deduction was one of the main reasons they incorporated their business in the first place.
You’ve taken enough ACA training courses that an internal alarm goes off. You realize that the client might be exposed to ACA tax liabilities for at least three of these issues. They are not aware of a required Form 1095 informational tax filing and are already past the die date. More significant from a liability perspective it that the transactions could result in an excise tax liability now approaching $50,000. Furthermore, the deadlines for provisions to mitigate the tax penalties have already passed.
What are your options?
- You can properly prepare the tax return as you always do, reporting the facts properly as intended under the self-assessment penalty provisions of the ACA. Your tax software produces a Form 8928 for the first time that indicates an additional tax liability is due in the amount of tens of thousands of dollars more than last year. You know this is completely unrealistic for multiple reasons.
- You can ignore the issue altogether and produce a tax return that looks much like last year’s tax return. We’ve read stories about business owners and professionals who ignore tax issues. It never ends well.
- You can report the transactions in your tax preparation software in a manner to avoid having the software produce a Form 8928 that indicates the excise taxes. The words “preparer liability” are ringing in your head.
- You can only hope the client does not ask “Why didn’t you tell me about this earlier!?” or make assertions that they are not liable for taxes that they did not know about. This is the part that really gets your blood pressure up. You can feel it happening just reading this article.*
Obviously, none of these are good options.
A better option: isolate and insulate
I suggest there is a better alternative and this alternative is the core of my own professional practice.
Here it is:
You should seek to immediately isolate the potential ACA liability and insulate yourself from its potential impact on the good relationship you have with your tax client. You simply say “I think we might have an issue here with the new ACA rules. Let’s bring in a specialist to handle that issue and we’ll focus on the rest of your return”. Any further discussion on the topic at this point simply works against you.
I actually learned to use this strategy effectively in the 1990s and early 2000s working with insurance brokers who did not want to bear the brunt of their client’s complaints about health insurance and never-ending rate increases, claim denials, and cuts in coverage. It was better for them to offer me as a messenger of bad news about the health plan (as in “kill the messenger” marketplace mentality) rather than risk their own valuable reputation. By outsourcing the health plan issues to me, the brokers actually increased their own profitability by not having to spend time on these issues and avoiding client resentment. These clients simply did not associate their insurance broker with the “bad news” health plan.
Specific strategies will evolve
At this point there are too many unanswered questions about IRS enforcement of ACA penalties for small business to address specific options for penalty abatement and relief.
I’m sure that there will be more posts here to follow on strategies to deal with 2015 ACA penalty issues for small businesses. But this first concept is by far the most important and the most valuable: If you hope to remain as the trusted tax adviser, you do not want to deal with it.
*For more blood pressure raising information, see my annotated bibliography on related topics.