Changing opinions on small business health plan penalty taxes

Section 4980D small business excise taxes on Form 8928: which penalty applies?

My article about Section 4980D excise tax penalties (NJ CPA magazine article on 4980D penalties) was written late last summer summer (in 2015) but published last week (in 2016). The risk of print media in a fast-paced topic like tax procedure is that it can be out-of-date by the time it reaches its audience.

The law has two levels of penalties: a 10% low level penalty and a $100 per employee per day penalty. It is logical to ask which penalty may apply.

In the article I spent much of the article discussing the lesser type of tax penalty for “Failures Due to Reasonable Cause and Not to Willful Neglect”. But now, after all this time and with violations extending into a second tax year for many taxpayers who are affected, I am not convinced that the lesser penalty will prevail in any of the more common circumstances.

By coincidence, today Robert W. Wood published an article in Forbes that explains the term “willful neglect” from the IRS perspective.  Wood explains two things: 1) the term “willful neglect” means something different to the IRS than you think it does, and 2) your failure to know the law does not preclude your unintentional error from being “willful neglect”. If IRS follows its standards, we can presume that most tax filers would be denied the 4980D Section A penalty for “Failures Due to Reasonable Cause and Not to Willful Neglect” and therefore would be subject to the $100 per employee per day penalty instead. But the bottom line is that nobody knows for sure how IRS will handle the new Form 8928 penalties for small businesses.

A footnote: I noticed there is a typo in the published article in NJ CPA magazine where I wrote “4890” instead of “4980”. I’m not the only one who made this error:  http://tonynovak.com/cpa/index.php/2015/11/01/health-plan-taxes-internal-revenue-code-section-4890d-or-4980d/