How to Respond to IRS Letter 226J About Affordable Care Act Penalties
It’s the letter no one wants to receive.
However, its coming and you need to be prepared just in case your company or client receives it.
It is Letter 226J, the communication that will be sent to Applicable Large Employers (ALEs), companies with 50 or more full-time or full-time equivalent employees it believes were not in compliance with the ACA for the 2015 tax reporting year. The IRS has released a sample of the letter, which you can see by clicking here.
The letter provides information on the individual employees who, for at least one month in the year, were full-time employees, were allowed a premium tax credit, and for whom the ALE did not qualify for an affordability safe harbor or other relief, as per instructions for Forms 1094-C and 1095-C, Line 16. It also provides the indicator codes for the ALE reported on lines 14 and 16 of each assessable full-time employee’s Form 1095-C.
The letter contains an ESRP summary table itemizing the proposed payment by month and indicating for each month if the liability is under section 4980H(a) or section 4980H(b).
Finally, the letter includes a response form, Form 14764, “ESRP Response,” and a description of the actions the IRS will take if the ALE does not respond in a timely manner to Letter 226J.
ALEs receiving Letter 226J need to be prepared to do the following:
- Provide information to the IRS by the response date shown in the letter, which will be 30 days from the date the letter was issued. The letter will contain the name and contact information of a specific IRS employee that the ALE should contact if the ALE has questions about the letter.
- Respond in writing, either agreeing with the proposed employer shared responsibility payment or disagreeing with part or all of the proposed penalty assessment. The letter will provide instructions on how the ALE should respond.
- Request a pre-assessment conference, if the ALE disagrees with the proposed or revised ESRP payment. Following this conference with the IRS, the ALE may also ask the IRS Office of Appeals to review the case.
The IRS will acknowledge any response to Letter 226J with a Letter 227.
What happens if the ALE doesn’t respond?
The IRS will assess the amount of the proposed ESRP shown in Letter 226J, and will issue a Notice and Demand for Payment (Notice CP 220J). This Notice offers directions and alternatives to pay the penalty.
What happens if the ALE agrees with the proposed ESRP?
The ALE may complete, sign, and date the enclosed Form 14764, ESRP Response, and return it to the IRS by the response date. If the ALE doesn’t pay the entire agreed-upon ESRP, it will receive a Notice and Demand notice for the balance due.
ALEs that receive Letter 226J only will have 30 days from the date of the letter to respond. Failing to do so could lead to a significant IRS penalty assessment for your client and, possibly, an IRS audit. The time to prepare is now.
To obtain an infographic that explains the process that triggers Letter 226J and how to respond, click here.
Click here to download a printable version.
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