IRS success: Franchisee recoups $3 million with 100% tax penalty abatement - McDermott Will & Emery

IRS success: Franchisee recoups $3 million with 100% tax penalty abatement


After a coffee and donut franchisee sold his Florida stores—more than 1,500 of them, to the tune of about $150 million—his transactions team made an unfortunate post-sale discovery. The franchise owner’s company was sitting on four years’ worth of unresolved Affordable Care Act (ACA) penalties, plus interest.

The company had been assessed with both Employer Shared Responsibility Payment penalties and separate information reporting penalties under the ACA for the 2016, 2017, 2018 and 2019 tax years related to the company’s provision of medical coverage for employees.

Paying the penalties and interest, in excess of $3 million, would impact the franchisee’s profits from the deal.


The IRS determines whether employee healthcare coverage is affordable on an employee-by-employee basis, which can make it difficult for companies to plan around. In this case, under the ACA, the franchisee’s company was subject to an Employer Shared Responsibility Payment penalty because the IRS deemed its employee healthcare coverage to be unaffordable for a large number of employees. The penalty was triggered when some of the company’s employees went to the state healthcare exchange and received Premium Tax Credits for the corresponding tax years.

The IRS sent notices for both the Employer Shared Responsibility Payment penalties and separate information reporting penalties, many of which were ignored because of a lack of internal communication between the company’s HR and finance departments. When the penalties and interest were discovered, the company attempted to work with the IRS on a resolution. However, they lacked the technical knowledge, nuanced understanding and experience to communicate effectively, and the revenue officer originally assigned to the case refused to address the underlying issues.


To help resolve the situation, the franchisee’s McDermott transactions team connected him with a cross-practice employee benefits and tax controversy team led by Jake Mattinson and Kevin Spencer.

The McDermott team represented the franchisee’s company before the IRS Independent Office of Appeals. Although the facts of the case were not in the franchisee’s favor, the goal was 100% penalty abatement—a $3 million savings.


Within just 16 months—an accelerated timeframe for resolving four years’ worth of penalties—the McDermott team succeeded in securing 100% penalty abatement for the company.

After initial conversations with the original revenue officer and a supervisor, McDermott got the case reassigned to a new IRS agent. The team was able to convince her to review all four years of penalties at once, rather than following the standard IRS practice of handling just one year at a time.

Following negotiations, the IRS ultimately agreed with the team’s argument that the company did offer healthcare coverage that was affordable to its employees based on the facts applicable to each individual employee who received Premium Tax Credits, and that the IRS never should have assessed the penalties in the first place. The IRS also agreed to reduce the information reporting penalties.

Drawing on skill and experience from handling dozens of similar matters, the McDermott team helped the client formulate proper responses, make an effective case and reach a resolution quickly and cost-efficiently.


ACA penalties have become increasingly common, particularly among companies with a significant number of hourly employees—such as restaurants, coffee shops and retail stores. These companies are more likely to offer health coverage the IRS considers unaffordable for their employees.

When issues are caught early, companies can avoid tax liens and additional penalties and come to a resolution with the IRS more quickly and easily. Because the franchisee’s company had ignored the IRS penalty notices for an extended time, the case was elevated and became more complex. Leaning on relationships within the IRS and years of experience, the McDermott team can help resolve Employer Shared Responsibility Payment penalties and related issues under the ACA at any stage, including pre-filing review and strategic planning.

Learn about our employee benefits and tax controversies capabilities.