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IRS Notice Proposing Employer Shared Responsibility Penalty Does Not Trigger Special Protections for Church Tax Inquiries

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IRS Chief Counsel Memorandum AM 2021-003 (June 8, 2021)

Available at https://www.irs.gov/pub/lanoa/am-2021-003.pdf

The IRS has released a Chief Counsel Memorandum addressing the process for assessing Code § 4980H employer shared responsibility penalties under the Affordable Care Act (ACA) against churches that are applicable large employers (ALEs). The memorandum explains that Code § 7611 protects tax-exempt churches from undue interference by permitting the IRS to begin a church tax inquiry (i.e., an inquiry as to whether the church is engaged in activities subject to taxation) only upon a written, reasonable-belief determination by a high-level Treasury official. The IRS must also provide specific information to church taxpayers before the inquiry can begin. However, Code § 7611 protections do not apply to “routine” IRS inquiries to a church, such as questions about information returns, income tax withholding, or processing of incorrect or incomplete returns. In 2018, the IRS Chief Counsel had advised that Code § 7611 should be applied to the IRS’s employer shared responsibility communications to church taxpayers—including Letter 226J, which is used to notify ALEs of a proposed Code § 4980H penalty amount (see our Checkpoint article).

The June 2021 memorandum reverses the Chief Counsel’s prior advice and determines that Letter 226J is rightfully characterized as a routine request for purposes of Code § 7611. The memorandum cites the following considerations:

  • Nature of Letter 226J. Prior to issuance of Letter 226J, ALEs cannot know whether they owe employer shared responsibility penalties—or the penalty amounts—because they do not know whether any full-time employees received premium tax credits for Exchange coverage. Accordingly, because Letter 226J provides essential information and Code § 4980H assessments could not function without this initial communication, the Letter 226J calculation is “entirely routine” in this context.
  • Source of Information. The Letter 226J is premised solely on information reported by church ALEs on Forms 1094-C and 1095-C and whether full-time employees received premium tax credits. The letter is not focused on obtaining additional information from the church.
  • Resolution of Tax Issues. The IRS generally accepts new information submitted by ALEs in response to Letter 226J, resulting in an adjusted or eliminated penalty. The memorandum notes that new information provided by church ALEs has usually resulted in the church owing no penalty, and determines that frequent resolution of proposed assessments after an initial round of communications demonstrates the routine nature of Letter 226-J.
  • Similarity to Other Routine Requests. The memorandum notes the similarities of the Letter 226J process with the nonexhaustive list of routine requests in Code § 7611 regulations, including confirming the accuracy of information returns (in this case, Forms 1094-C and 1095-C).

The memorandum concludes that because Letter 226J is considered a routine request, the Code § 7611 protections need not be applied.

EBIA Comment: Although the memorandum addresses a narrow issue directly affecting only church ALEs, all ALEs and their advisors may be interested in the description of the Code § 4980H penalty assessment process. ALEs may especially be heartened by the observation that proposed penalties often are reduced or eliminated based on information provided in response to Letter 226J. For more information, see EBIA’s Health Care Reform manual at Section XXVIII.H (“Payment of Premium Tax Credits, Notification From Exchange, and Assessment of Employer Penalties”) and EBIA’s Form 1094/1095 Workbook at Section XV (“Penalty Assessment”).

Contributing Editors: EBIA Staff.

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