The IRS issued a Chief Counsel Memorandum confirming that churches are not protected from receiving Employer Shared Responsibility (ESRP) penalty letters. Tax-exempt churches are generally protected from undue interference by the IRS and churches must be given certain information before an IRS inquiry into church matters may begin.
The Chief Counsel Memorandum advises that the ESRP proposed penalty letter process is a routine inquiry and the IRS is permitted to make that inquiry without following any special church-related processes. A copy of the Memorandum may be accessed by clicking here.
The Memorandum explains the options for an employer to respond to the issuance of an employer ESRP penalty letter (specifically Letter 226-J). Specifically,
- If the employer does not respond to the letter, the IRS sends a second substantially similar letter. If the employer does not respond to that letter, the IRS begins assessment procedures without initiating an examination.
- The employer may respond to the letter by providing additional information to the IRS that clarifies or corrects the previously reported information from Forms 1094-C and 1095-C. These corrections may either reduce or fully eliminate the preliminary calculation of the ESRP. If the ESRP is fully eliminated as a result of the clarified or corrected information, the IRS will not assess the penalty and no further action will be taken.
- The employer can agree with the preliminary calculation and send payment with a response or wait until the employer receives a notice and demand for payment.
If the IRS determines that the employer still owes an ESRP after taking into account any response and the employer disagrees with all or part of the ESRP amount listed, the employer has the option to take the case to the IRS Independent Office of Appeals.
The Memorandum provides interesting information about church responses to ESRP letters
“After two years of administering the ESRP compliance program as applied to taxpayers that are churches, TE/GE’s experience is that the vast majority of churches that receive Letter 226-J clarify or correct the information they previously reported to the IRS on Forms 1094-C and 1095-C, and that such clarification or correction usually results in elimination of the liability preliminarily calculated in the Letter 226-J…. Approximately 90% of the church ALEs that receive the Letter 226-J clarify or correct the information contained in the letter and are ultimately not assessed any ESRP.”
One key take-away is that it is important to address ESRP letters as they arrive and engage with the IRS to provide updated information if necessary to avoid penalty assessments.
