For businesses that fall under the Affordable Care Act (ACA) regulations, maintaining compliance is not just a requirement—it’s a necessity. Failure to meet reporting obligations can result in IRS scrutiny, penalties, and potential operational disruptions.
One of the most significant signals of a compliance issue is the receipt of Letter 5699 from the IRS. This notice serves as an inquiry into whether a business has fulfilled its ACA reporting duties, and failing to address it promptly can lead to severe consequences.
This guide provides an in-depth explanation of Letter 5699, why the IRS sends it, and how business owners can address it effectively. From understanding the ACA requirements to crafting an appropriate response, this comprehensive resource ensures you’re equipped to handle the situation confidently.
What Is Letter 5699?
Letter 5699 is a formal notice issued by the IRS when there is suspicion that a business has failed to meet its ACA reporting requirements. Under ACA regulations, certain businesses—categorized as Applicable Large Employers (ALEs)—must submit specific forms annually. These forms, Form 1094-C and Form 1095-C, serve as documentation of health coverage offerings to employees.
When these forms are missing, incomplete, or inconsistent with other IRS records, the agency sends Letter 5699 as a first step to gather clarification. The notice outlines what the IRS believes may be missing and gives the recipient an opportunity to explain their situation.
This notice does not necessarily indicate wrongdoing. Instead, it reflects that the IRS has flagged the business’s records for review. The letter includes details about the specific tax year in question, instructions for how to respond, and a deadline by which the response must be submitted. Responding thoroughly and within the given timeframe is critical to avoiding escalation or penalties.
Why Does the IRS Issue Letter 5699?
Letter 5699 is an essential tool for the IRS to enforce ACA compliance. The ACA requires businesses meeting the ALE threshold—typically defined as having 50 or more full-time equivalent employees—to offer affordable health insurance to their full-time employees and document this through filings. However, many businesses inadvertently fall out of compliance, either by misunderstanding the requirements or missing reporting deadlines.
The IRS identifies potential noncompliance using its internal systems and third-party data, such as information from health insurance providers, payroll filings, or tax returns. A discrepancy in this data, such as a mismatch between reported employee counts and the lack of ACA forms, may prompt the issuance of Letter 5699. Businesses that fail to provide health insurance entirely are also likely to be flagged.
The letter itself serves as an inquiry rather than an accusation. The IRS uses it to confirm whether the employer should have filed ACA forms, and if so, whether the omission was accidental or intentional. Responding accurately and promptly ensures that the matter can be resolved without further action.
What to Do If You Receive Letter 5699
Receiving Letter 5699 may feel overwhelming, but addressing it methodically can prevent the issue from escalating. The first step is to carefully review the notice. The letter will specify the tax year in question, the information the IRS is requesting, and the timeline for response. Typically, businesses are given 30 days from the date of the notice to respond.
The next step involves verifying your ACA reporting obligations. To determine if your business qualifies as an ALE, calculate the total number of full-time equivalent employees during the relevant year. If your employee count exceeds the ALE threshold, you are required to file Forms 1094-C and 1095-C. Check your records to confirm whether these forms were submitted for the year in question.
If the forms were filed, your response should include the filing details, such as the submission date and method. If you failed to file the forms, you will need to explain the circumstances and outline your plan to correct the omission. This may involve submitting the forms retroactively, along with any supporting documentation that demonstrates your intent to comply.
Accuracy is critical when responding to Letter 5699. Any errors or inconsistencies in your response can prolong the process or lead to penalties. If you are uncertain about how to proceed, consult a tax professional or an ACA compliance expert. These professionals can help ensure that your response is both accurate and complete.
Potential Penalties for Not Responding to Letter 5699
Failing to respond to Letter 5699 can result in severe financial and administrative consequences. The IRS enforces ACA compliance through a series of penalties outlined in Sections 6721 and 6722 of the Internal Revenue Code. These penalties are applied to businesses that fail to file the required ACA forms or fail to provide these forms to their employees.
For each missing or late ACA form, the IRS imposes a penalty. For the tax year 2023, the penalty amount is $290 per form, and the maximum annual penalty for large employers is $3,532,500. This applies separately to the failure to file forms with the IRS and the failure to furnish forms to employees, effectively doubling the potential penalty exposure.
Ignoring Letter 5699 also increases the likelihood of further IRS enforcement actions, including audits. If the IRS determines that the failure to comply was intentional, it may impose even steeper penalties. For businesses already facing financial challenges, these penalties can be devastating, making it essential to address Letter 5699 promptly and thoroughly.
Best Practices for ACA Compliance
The best way to avoid receiving Letter 5699 is to maintain proactive ACA compliance. Businesses should begin by establishing clear systems for tracking employee hours and benefits eligibility. Accurate tracking ensures that you know exactly which employees qualify for health insurance under ACA rules.
Filing ACA forms on time is another critical step. Employers should be aware of the annual IRS deadlines for submitting Forms 1094-C and 1095-C. Late filings not only increase the risk of notices like Letter 5699 but also attract penalties for noncompliance.
Keeping accurate records is equally important. Maintain documentation of all employee health coverage offers, benefits elections, and any relevant communications with employees regarding coverage. In the event of an IRS inquiry, these records serve as evidence of your intent to comply.
Using ACA compliance software or services like 1095 EZ Online can also streamline the reporting process. These tools automate many of the time-consuming tasks associated with ACA compliance, reducing the likelihood of errors or missed deadlines.
How 1095 EZ Online Can Help with Letter 5699
For businesses that receive Letter 5699, responding effectively often requires professional assistance. 1095 EZ Online specializes in helping businesses navigate ACA compliance and IRS inquiries. Their team of experts provides tailored support to ensure that your response is accurate, timely, and comprehensive.
The first step is a compliance review. This involves assessing your current ACA reporting status and identifying any gaps or inconsistencies. Once these issues are identified, 1095 EZ Online helps you draft a response to Letter 5699 that addresses the IRS’s concerns while minimizing your exposure to penalties.
Beyond responding to Letter 5699, 1095 EZ Online offers ongoing compliance support. Their services include tracking employee eligibility, generating ACA forms, and submitting them to the IRS on your behalf. This proactive approach not only ensures compliance but also prevents future notices from the IRS.
Handle Letter 5699 with the Help of 1095 EZ Online
Receiving Letter 5699 from the IRS is a clear signal that your ACA reporting requires attention. However, it doesn’t have to result in penalties or further enforcement actions. By understanding the purpose of the letter, verifying your compliance obligations, and responding accurately, you can resolve the issue efficiently.
For businesses that need additional guidance, 1095 EZ Online provides expert support to navigate the complexities of ACA compliance. Their services ensure that you remain compliant and avoid future issues with the IRS. Get started today to protect your business and maintain peace of mind.