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Do You Need Help with an Employer Shared Responsibility Payment (ESRP) / IRS Letter 226-J?

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Receiving a letter from the Internal Revenue Service (IRS) can be a daunting experience for small businesses, especially when the one in question is Letter 226-J.

Letter 226-J is a notice issued by the IRS to inform an employer that they may be liable for

an Employer Shared Responsibility Payment (ESRP) under the Affordable Care Act (ACA). The ESRP is a penalty imposed on applicable large employers (ALEs) who fail to offer affordable health coverage to their full-time employees and dependents, or if the offered coverage does not meet minimum value standards. The ESRP may be triggered by at least one employee receiving a premium tax credit through a state or Federal insurance exchange.

When you receive Letter 226-J, it is crucial to read and understand its contents thoroughly. The letter includes:

  1. A short explanation of the ESRP and the reason(s) for the proposed penalty.
  2. The penalty amount for the tax year in question.
  3. A list of employees who received premium tax credits, which triggered the penalty.
  4. Instructions on how to respond to the letter.
  5. Forms and documentation to review and complete.

Steps to Take After Receiving Letter 226-J

  1. Don’t panic: Remember, receiving Letter 226-J does not mean you are automatically liable for the penalty; it is an initial assessment, and you have the opportunity to respond.
  2. Review the information: Carefully review the employee list and the penalty calculation. Ensure that your records match the information provided by the IRS. If you find any discrepancies, document them with supporting evidence.
  3. Consult with professionals: Reach out to your tax advisor, human resources department, or legal counsel for guidance. They can help you understand the implications of the letter and ensure you respond appropriately.
  4. Prepare your response: You have a limited time to respond. Complete the forms provided, including Form 14764 (ESRP Response) and Form 14765 (Employee Premium Tax Credit Listing). If you disagree with the proposed penalty, provide a detailed explanation and any supporting documentation.
  5. Submit your response: Send your response to the IRS by the specified deadline. Consider sending your response via certified mail, ensuring you have proof of mailing and delivery.
  6. Await the IRS’s reply: After submitting your response, the IRS will review your submission and respond with either Letter 227, which outlines the next steps, or a revised Letter 226-J. The process may take several months, so be prepared to wait.
  7. Pay or appeal: If the IRS agrees with your response, you may not be liable for any penalties. However, if the IRS disagrees or you still believe the penalty is incorrect, you can request a pre-assessment conference with the IRS Office of Appeals. If you ultimately owe the ESRP, be prepared to pay the penalty to avoid additional interest and penalties.

Receiving Letter 226-J from the IRS can be intimidating, but with a clear understanding of the letter’s purpose and the appropriate steps to take, you can navigate the situation effectively. Remember to stay organized, consult with professionals, and respond promptly to ensure the best possible outcome.

This information is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2023 Angus McRae Insurance Brokerage Services, Inc. All rights reserved.

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