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 226J” in early November. These letters will go to the individual listed as the contact person on line 7 of Form 1094-C. Some employers will have filed more than one Form 1094-C and will have different contact people listed.

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”).

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.

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 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.

  • Your first step should be to call the IRS number located on the top of the Form 14764 (included with the Letter 226J) and request additional time to respond.
  • 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. So far, the IRS has not indicated whether they will accommodate requests for additional time to reply. Our advice is to move quickly.
  • 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 describe further actions you must take. Watch for your Letter 227 and continue to pay close attention to any Response Date. If the IRS is planning to continue the dispute, you will have an opportunity to schedule a pre-assessment conference with the IRS Office of Appeals.