What is the IRS process for assessing penalties under the Affordable Care Act?

The IRS has been busy reviewing ACA employer reporting forms filed for plan years that began in 2015. Based on this review, they started sending “Letters 226Js” in early November. These letters will go to the individual listed as the contact person on line 7 of Form 1094-C. The IRS appears to be sending the letters out in batches for the 2015 calendar year as we have seen some dated May 2018. However, once the IRS finishes reconciling assessments for 2015, they will begin assessing for 2016, and then 2017.

How do I know if I received a letter from the IRS telling me I owe a penalty under ACA?

Your letter will begin by saying that the IRS has “made a preliminary calculation of the Employer Shared Responsibility Payment (ESRP) that you owe.” The letter will probably have a label on the bottom right corner that says

“Letter 226J.” It will also include an ESRP Summary Table and Explanation; Form 14764 (“ESRP Response”); and Form 14765 (“Employee Premium Tax Credit (PTC) Listing”). More information specific to the Letter 22J may be found at https://www.irs.gov/individuals/understanding-your-letter-226-j.

What are the next things I should do if I plan to pay the penalty?

Just follow the instructions in Letter 226J and include your payment with Form 14764 (You should receive a copy of Form 14764 in your initial letter from the IRS).

What is the first thing I should do if I disagree with the IRS letter?

The first thing to do is look at the dates in the upper right corner on the first page of the IRS Letter. The “Response Date” is very important. Failure to respond by this date may result in a demand for payment from the IRS and could make it more difficult to challenge the IRS. You should call the IRS at the number listed both on the first page of the Letter 226J, as well as on the top of Form 14764, to request an extension. In most cases, the IRS has granted extensions of 30 days.

What are the next things I should do if I plan to dispute the penalty? 

Consider whether you will engage someone to assist you in dealing directly with the IRS. Who does your organization typically use to respond to IRS tax-related issues? Likely candidates include a lawyer or accountant who can represent you before the IRS. We are prepared to provide assistance regarding benefit plan information to compile the necessary material for you, or your lawyer or accountant, to respond to the IRS.

  • Complete and sign Form 14764 and assemble all supporting materials. Your reply must include a signed statement indicating why you object to the penalty, changes you want to make to your reporting forms, and changes to preprinted forms you received along with the IRS Letter 226J.
  • Form 14765, Employee PTC Listing – Make changes, if any, on the Employee PTC Listing. Include your revised Employee PTC Listing, if necessary, and any additional documentation supporting your changes with your Form 14764, ESRP Response, and signed statement.
  • Get moving. We cannot stress enough that a proper response may require significant effort to prepare.
  • Make sure the IRS receives your completed package BY THE RESPONSE DATE INDICATED ON YOUR INITIAL LETTER FROM THE IRS or any extension granted in response to your request for more time.

What happens after the IRS receives my timely objections?

The IRS will respond with a “Letter 227.” Your Letter 227 will include a 227 in the bottom right corner followed by a J, K, L, M, or N indicating whether or not the IRS has accepted all or a portion of your appeal, and describe further actions you must take, if any. Watch for your Letter 227 and continue to pay close attention to any Response Date. More information in regard to each of the Letter 227s may be found at https://www.irs.gov/faqs/irs-procedures/notices-letters/understanding-your-letter-227.

What happens if I fail to respond to the IRS?

If the IRS does not receive a response, the IRS will send a formal collection letter (CP220J Notice). Upon receiving a CP220J Notice, the employer is required to make payment. If there is a desire to appeal, the employer may utilize the IRS’ formal appeal process and request a refund of payment if successful. This process is more burdensome and can be avoided by responding in a timely fashion to the Letter 226J, and if applicable, the Letter 227. More information in regard to the CP220J Notice may be found at https://www.irs.gov/individuals/understanding-your-cp220j-notice.