Letter 5699: the IRS inquiry for missing Forms 1094-C and 1095-C, the four answers, and what follows each one

Who files, and who is selected

An applicable large employer "generally is, for a calendar year, an employer that employed on average at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year," counted across an aggregated group under IRC 414 (IRM 25.21.4.3, Oct. 22, 2021). Each ALE member files Form 1094-C with a Form 1095-C for each full-time employee "by February 28 (March 31 if filing electronically) of the year following the calendar year to which the return relates," and furnishes the 1095-C by January 31 (IRM 25.21.4.4). The failure-to-file and failure-to-furnish penalties are IRC 6721 and 6722, the same sections that govern 1099s.

Selection is systemic. "Information Return Case Selection (IRCS) will use a list of identified non-filers to establish selection criteria and prioritize the information return non-filer cases," with two tracking codes: "8073 (Non-filers - did not file)" and "8251 (Stop-filers - filed in previous year but not the next)" (IRM 25.21.4.4.1). The second code is the one that catches a company that changed payroll vendors or EINs. Cases exist only on the examination control system, not on your master file account, until a letter is mailed; at that point a transaction code marks the account as having received the inquiry (IRM 25.21.4.4.3).

The same check is made by any field examiner auditing your income tax return: "Examiners must verify that required health coverage information returns are filed," using IRPOL, and an ALE that did not file is referred for the penalties and the employer shared responsibility payment (IRM 4.10.5.13, Aug. 23, 2019; see the 1099 check inside every IRS audit).

The path of the inquiry

"Letter 5699, Missing Information Return Form 1094/1095-C Letter, is used to make initial contact with the employer ... It asks the employer to respond to the letter by marking the appropriate block and returning it as directed in the letter" (IRM 25.21.4.4.3). The letters are mailed in batches by the National Distribution Center, which is why they arrive without an examiner's name on them; an examiner is assigned only when a case needs work.

The four answers on Letter 5699

The letter offers four positions, and the manual prescribes what the examiner does with each (IRM 25.21.4.4.4 and 25.21.4.4.4.2, Oct. 22, 2021).

Two points in that table are easy to miss. The "should have filed" box asks for the reason as well as the forms; a response with forms and no explanation draws a call, and the explanation given on that call is what the reasonable-cause decision rests on. And the "not an ALE" box without documents is not accepted on its face.

The EIN rule

This is the most common way a compliant employer ends up with a Letter 5699: the parent, a professional employer organization, or a payroll provider filed the 1094-C and 1095-Cs under its own EIN. The IRS treats those as someone else's returns. The fix is to file under the employer's EIN; the returns filed under the wrong one do not transfer. The same principle governs 1099s filed by a parent or agent, and the entity rules behind it are on new EINs after a merger.

Paper returns and the e-file threshold

The 2021 manual tells the examiner to accept paper returns from an ALE only if "the number of information returns submitted are 250 or less. Returns in excess of 250 are required to be filed electronically," and otherwise to tell the employer to file electronically "or they may be subject to a penalty for failure to file returns using the correct media" (IRM 25.21.4.4.4.2). That 250 figure predates the regulations that lowered the electronic filing threshold to 10 returns in aggregate for returns due in 2024 and later; the manual has not been revised since October 2021. An ALE by definition has at least 50 full-time employees and will exceed 10 returns, so in practice delinquent 1095-Cs are filed electronically, through the ACA Information Returns system rather than IRIS. Proof of that filing is what the examiner verifies on IRPOL.

The penalty case

"Issue a Letter 5698, Corrected Form 1094/1095-C, if the employer does not respond to the inquiry letter within the allowed time. If there is no response to the Letter 5698, the case will be assigned to an examiner to consider pursuing a penalty case file for Failure to File and Failure to Furnish" (IRM 25.21.4.4.4.1). Before opening it, "the examiner will attempt to contact the employer by telephone if a phone number is available on IDRS." The penalty file is separate from the inquiry, needs a manager's signature on Form 8278, and is proposed by "Letter 5005-A, Information Return Penalty Cover Letter" with "Form 886-A, Explanation of Items," which "will be issued with the Letter 5005-A to give the employer the facts, law and conclusion regarding the penalty application" (IRM 25.21.4.5.1, 25.21.4.5.2).

The penalties are assessed on the civil penalty module, MFT 13, the same place a 972CG penalty lands, and the procedures are those of IRM 20.1.7. The failure-to-file penalty applies to Forms 1094-C, 1095-B and 1095-C; the failure-to-furnish penalty to Forms 1095-B and 1095-C (IRM 4.10.5.13). Reasonable cause is the defense, and the route after assessment is the same as for any information return penalty: reconsideration and appeal.

The employer shared responsibility payment is a separate track with its own letters (226-J and 227). The non-filer inquiry feeds it, since the IRS cannot compute the payment without the 1095-C data, but Letter 5699 itself is about the returns.

Churches

"If the employer self-identifies as a church in response to the Letter 5699 or subsequent correspondence, the examiner will stop processing the case immediately. These cases will be worked by TE/GE" under the IRC 7611 church inquiry rules (IRM 25.21.4.4.4.2.1). A church that is an ALE still files; what changes is who may ask.

How to answer

• Check IRPOL's view before you answer. Pull your own transmission acknowledgments from the ACA Information Returns system for the year, under your EIN. If the receipt ID is under another EIN, you have your answer and your problem.
• If a parent or provider filed for you, refile under your EIN. Say so in the response, with the date.
• If you were not an ALE, send the count. Full-time and full-time-equivalent employees by month for the preceding year, with the aggregation analysis if you are in a controlled group. The examiner is told to test the claim, not accept it.
• If you should have filed, file electronically and give the reason. The reason is what the penalty turns on; a response without one triggers a call to get it.
• Do not let Letter 5698 go unanswered. It is the last step before an examiner is assigned and a penalty file is opened.
• Match the TINs first. A 1095-C with an incorrect employee or dependent TIN is a 6721 and 6722 exposure of its own under the same sections; the TIN solicitation rules for health coverage returns are in the Treas. Reg. 1.6055-1 and 301.6724-1 framework described on the reasonable-cause regulation.

Questions people ask