The Anatomy of an IRS Letter 5699

If you are reading this because you have received an IRS Letter 5699, this is a great first start to educate yourself on what this letter means and how you can put your best foot forward to respond.  

A timely response may improve any leniency that the IRS may grant, but do not let the time run out, as these penalties can double (or even increase by almost 500%!) in a matter of less than six months!

What is IRS Letter 5699?

Letter 5699 is the Internal Revenue Service’s first contact to an employer notifying the employer that they were potentially delinquent with an information return relating to Form 1094-C and Form 1095-C, required for the Affordable Care Act (“ACA”).  

This letter would only be sent to large employers (over 50 full-time employee equivalents) who the IRS believes should have filed these two forms.  The form begins the IRS’s official information-gathering process for the tax year in question and the employer listed on the letter.

What information is on Letter 5699?

Page 1: Letter 5699 will ALWAYS be mailed to the employer on IRS letterhead, and it is normally mailed from the group in Ogden, Utah, which is where the ACA group sits.  The IRS will NEVER contact an employer via any method of communication other than U.S. Postal Service for an initial Letter 5699.  The IRS will never call, text, or email.  They will use the good old fashioned U.S. postal service.

Page 2: There are several check boxes for the Taxpayer to reply back to the IRS relating to the filing and/or Applicable Large Employer (“ALE”) determination:

• Confirming that the employer was an ALE for the year in question and that Form 1094-C and Forms 1095-C were already filed.  If the Employer checks this box, the IRS requires you to include the (1) Employer Name, (2) EIN, and (3) date the ACA returns were filed.

• Confirming that the employer was an ALE group for the year in question and the Letter 5699 response includes paper filed Form 1094-C and Forms 1095-C with this completed form (please note: this selection will phase out beginning in 2023 Letter 5699s).

• Informing the IRS that the employer was an ALE for the year in question and that Form 1094-C and Forms 1095-C and will be filing the forms.  If the Employer checks this box, the IRS requires you to include the (1) Employer Name, (2) EIN, and (3) date the employer commits to filing ACA returns.

• Noting that the employer was not an ALE group for the year in question.  If this box is selected, the employer must provide enough information to the IRS to confirm this treatment.

There is a section to provide the IRS with additional Other information.  This section can be expanded with a longer area including additional attached pages. 

Can the IRS be wrong about the Applicable Large Employer determination?

This may (or may not) surprise you, but the IRS can be wrong about an ALE determination by opening an inquiry via a Letter 5699, which is why there is the option to confirm that the employer was not an ALE group.  

Without a record of a filing, the IRS does not have Form 1094-C or Forms 1095-C to verify the number of employees that should have received Minimum Essential Coverage, required under the PPACA.  The only information that the IRS can reasonably use to assume the number of employees that should receive coverage are the W-2 and W-3 forms.  

However, that is an imperfect number, for a few reasons, examples of which are below:

• If there is an industry or employer with high turnover, the W-3 count dodoes not represent the full-time equivalent employee counts;
• If the employer relies principally on a part-time workforce (e.g., retail businesses, hospitality businesses, etc.), the W-3 count does not represent the full-time equivalent employee counts.

Ensuring that you have appropriately measured your full-time equivalent employee counts and Affordable Care Act full-time employees can significantly impact the next steps beyond the Letter 5699 response.

Importance of Timely Responses

The initial response date on Letter 5699 is not something to take lightly.  It acts as a first strike against the Employer if you miss it.  A perfectly reasonable response to Letter 5699 is a request for additional time to perform the required due diligence.  The IRS deals in 30-, 60-, and 90-day extensions and deadlines, so it is reasonable to ask for up to 60 days to perform this due diligence.

If the Employer does not respond in time, the IRS will send the next letter in succession – the Letter 5698 – giving the Employer another chance to respond to the IRS in order to avoid penalties.  

Letter 5698 is the last strike.  Avoiding this response to this second letter elevates the issue to an IRS examiner to process a potential penalty.  As a reminder, the penalties for late filing and furnishing forms to employees are as follows (for 2023 year):

• Within 30 days of March 2: $50
• Between April 1 and August 1: $110
• After August 1: $290

For example, if the IRS is investigating an employer with 80 full-time benefit-eligible employees after August 1, the proposed penalties for missing the previous years’year’s reporting deadline will start at $46,690, that includes:

• Failure to File eighty (80) 1095-C Forms (Section 6721) = 80 x $290 = $23,200
• Failure to File one (1) 1094-C Form (Section 6721) = 1 x $290 = $290
• Failure to Furnish 80 1095-C Forms (Section 6722) = 80 x $290 = $23,200

Imagine the proposed penalties for a retail establishment with over 1,000 W-2 employees!?  This proposed penalty will exceed $500,000!

What do you do if you receive this letter?

The best course of action immediately after receiving the letter is to notify any (1) individuals inside your organization or (2) service providers outside of your organization who have responsibility for the reporting required under the ACA.  This may include anyone from HR, payroll, benefits, or finance who has a hand in reporting payroll-related information to the IRS.

These individuals may have the information available to submit the Letter 5699 using Option #1 (yes, we filed, but under a different company/EIN).  Additionally, these individuals may be able to determine whether the company had enough full-time employees to be subject to the ACA reporting requirements – requiring you to selection Option #2, #3, or #4 for the Letter 5699.

If you find yourself needing to select Option #2, #3, or #4, you have a decision ahead of you:

• Empower those individuals internal to the organization to complete Form 1094-C and Forms 1095-C or respond to the IRS by the required deadlines set by the IRS or requested by the employer;
• Engage those external services providers (e.g., payroll) to complete Form 1094-C and Forms 1095-C on your behalf (if you choose this route, be mindful of the fact that these service providers may have inadequately informed you of the filing requirements in the first place!);
• Consider contacting an expert in the field of IRS remediation responses, like Paragon Compliance, to take control of your Letter 5699 response.

What can Paragon Compliance do to help?

1. Paragon files prior year Form 1094-C and Form 1095-C ACA filings swiftly to ensure that the IRS will begin a negotiation to reduce or eliminate any potential penalties stemming from the initial Letter 5699;
2. Paragon can also help an employer determine if they met the requirements of the ALE group for filing in the particular tax year that the IRS is reviewing – it is possible that given a consideration of the classification of employees and the number of hours worked on average that the employer may NOT have a filing requirement for the year in question.
3. Paragon will also act as Power of Attorney to prepare written statements to the IRS on behalf of the Employer to be sure that the employer clearly articulates the facts and circumstances of the case to attempt to have penalties reduced or even fully abated.