IRS Letter 226J is the initial notification that the IRS believes an Applicable Large Employer (ALE) — an organization with 50+ full-time equivalent employees — has failed to comply with the ACA’s Employer Mandate.
Important: This letter is not a final bill; it is a preliminary proposal of an Employer Shared Responsibility Payment (ESRP).
The Trigger
The letter is triggered automatically when at least one full-time employee receives a Premium Tax Credit (PTC) from a state or federal health exchange. This signals to the IRS that your organization either:
- Failed to offer Minimum Essential Coverage (MEC) to at least 95% of your full-time workforce; or
- Offered coverage that was unaffordable or did not provide Minimum Value.
What Is Inside the Envelope?
The packet contains critical data you will need to build your defense:
- ESRP Summary Table: A breakdown of the proposed penalty amount by month.
- Form 14765: The list of specific employees who received a tax credit and triggered the assessment.
- Form 14764: The response form you must use to agree or disagree with the penalty.
Receiving Letter 226J does not guarantee you owe money. In many cases, these assessments are caused by data reporting errors (like incorrect codes on Form 1095-C) rather than actual non-compliance. However, to dispute it successfully, you must first understand exactly which penalty is being assessed.
How Are ACA Penalties Assessed (The “A” vs. “B” Penalty)?
The IRS uses the Affordable Care Act Compliance Validation (ACV) system to automatically identify non-compliant employers.
Letter 226J will propose one of two types of penalties. It is critical to understand which one you are facing, as the calculation methods differ significantly.
The “A” Penalty
The “A” Penalty (IRC 4980H(a)) is the most severe. It is triggered if an ALE fails to offer Minimum Essential Coverage (MEC) to at least 95% of its full-time workforce (and their dependents) and at least one full-time employee receives a PTC.
- How it is calculated: The penalty applies to every full-time employee (minus the first 30), regardless of whether they received a credit or not.
- 2025 Example Calculation:
$2,900 (Annualized) ÷ 12 months x [Total Full-Time Employees – 30]
The “B” Penalty
The “B” Penalty (IRC 4980H(b)) is triggered if the ALE met the 95% offer threshold but failed to offer affordable or Minimum Value (MV) coverage to specific full-time employees.
- How it is calculated: This penalty is assessed only for each specific full-time employee who receives a PTC.
- 2025 Example Calculation:
$4,350 (Annualized) ÷ 12 months x [Number of Full-Time Employees Receiving a PTC]
Note: You cannot be assessed both penalties for the same month. The IRS calculates both and assesses the lesser of the two amounts (The “B” penalty is capped at the total potential “A” penalty liability).
How do you Respond to Letter 226J?
The first step is to review the ESRP Summary Table included in the letter. This table breaks down the penalty by month and by employee. Once you have reviewed the data, follow these steps:
1. Review the Response Deadline
Under the Employer Reporting Improvement Act, employers have 90 days from the date of the letter to respond (increased from the previous 30-day window).
Action: Check the “Response Date” listed on the first page of the letter. If you need more time, you must request an extension before this deadline expires.
How to Request an Extension:
- Option A (Fastest): Call the IRS contact number listed on the top right corner of the letter. Be prepared to provide a valid reason for the delay (e.g., “We are waiting for archived data from a previous payroll vendor”).
- Tip: If granted, write down the agent’s name, ID number, and the specific new deadline.
- Option B (Written): Fax a written request to the fax number listed on the Form 14764 included in your packet. Keep your fax transmission receipt as proof.
Warning: Because the standard window has been tripled to 90 days, the IRS is now stricter about granting additional extensions. Do not assume an extension will be automatically approved without a compelling reason.
2. Audit the Employee List (Form 14765)
The letter includes Form 14765, which lists the specific employees who triggered the penalty. Compare this list against your payroll and benefits records.
- Check for Coding Errors: Did you offer coverage but use the wrong Line 14/16 codes?
- Check Full-Time Status: Was the employee actually part-time or in a limited non-assessment period?
3. Submit Your Response (Form 14764)
You must respond in writing using Form 14764 (ESRP Response). You have two options:
- Agree: Check the box agreeing to the payment and submit payment instructions (not recommended without a professional review).
- Disagree: Check the box disagreeing with part or all of the penalty. You must include a signed statement explaining your disagreement and, if necessary, a corrected Form 14765 with the proper codes.
How the IRS Acknowledges Your Response
After you submit your response to Letter 226J, the IRS will review your evidence and issue one of five versions of Letter 227. This series serves as the official acknowledgment and outlines the next steps.
- Letter 227K: The IRS accepts your explanation, the penalty is reduced to zero, and the inquiry is closed.
- Letter 227L: The IRS agrees to reduce the penalty but not eliminate it entirely. You will receive an updated penalty calculation.
- Letter 227M: The IRS disagrees with your response and reiterates the demand for the original penalty amount.
- Letter 227J: Issued when an employer agrees to the penalty. It confirms the case is closed and prepares for the final bill.
- Letter 227N: Issued after an Appeals conference, stating the final decision of the Appeals Office.
What if I Still Disagree?
If you receive a Letter 227L or 227M and still disagree with the findings, you may request a Pre-Assessment Conference with the IRS Office of Appeals.
- Action: You must submit a written protest by the response date shown on Letter 227 (typically 30 days). Refer to IRS Publication 5 (“Your Appeal Rights”) for instructions.
Other ACA Notices to Watch For
IRS Letter 226J is often the final stage of a long compliance process. Before a financial penalty is proposed, employers typically receive warning signs or precursor inquiries. Understanding these notices can help you stop a penalty before it starts.
The Exchange Notice (The Early Warning)
An Exchange Notice (also called a Marketplace Notice) is a letter sent by a state or federal health exchange (such as Healthcare.gov or Covered California). It notifies an employer that one of their employees has applied for individual health coverage and been found eligible for a Premium Tax Credit (PTC).
The Trigger: This notice is triggered automatically when an employee attests to the Marketplace that their employer did not offer them affordable, minimum value coverage.
The Risk: Do not ignore this. The Exchange Notice serves as a critical early warning indicator. If an employee receives a PTC, that specific data point is eventually reported to the IRS. If you do not appeal the notice to correct the record (e.g., proving you did offer affordable coverage), the IRS will likely use that uncorrected data to issue a Letter 226J penalty assessment for that employee 12–36 months later.
The Deadline: You generally have 90 days from the date of the notice to file an appeal.
The Strategy: Treat this as a pre-penalty defense.
- Audit the Employee: Did you offer them coverage? Was it affordable based on their W-2 wages or Rate of Pay?
- File an Appeal: Submit the appeal form along with proof of your offer (e.g., the employee’s signed waiver or enrollment screenshot) to the Exchange. Winning this appeal can prevent the IRS penalty entirely.
IRS Letter 5699 (The Non-Filer Inquiry)
IRS Letter 5699 is a compliance inquiry sent to organizations the IRS suspects are Applicable Large Employers (ALEs) but for whom they have no record of an ACA filing (Forms 1094-C and 1095-C) for a specific tax year.
The Trigger: The IRS compares W-2 data (total employee count) against ACA filings. If you filed W-2s for 50+ full-time equivalent employees but did not file 1095-Cs, the system flags you as a potential Non-Filer.
The Consequence (Escalation to Letter 5005A): This is not yet a penalty, but it is the immediate precursor to one.
- If you respond: You can confirm you were not an ALE (if true) or file the missing returns immediately to limit exposure.
- If you ignore it: The IRS will escalate the case to Letter 5005A. This notice formally assesses penalties under IRC Section 6721 (Failure to File) and Section 6722 (Failure to Furnish). These penalties are indexed for inflation and can exceed $500+ per return (over $100,000 for a mid-sized company).
The Strategy: If you receive Letter 5699, you must respond within 30 days. If you forgot to file, your best strategy is to engage a vendor to generate and transmit the missing 1094-C/1095-C forms immediately and request penalty abatement for Reasonable Cause.
IRS Letter 972CG (The Late Filer Penalty)
IRS Letter 972CG is a proposed penalty notice for late filing or incorrect information. Unlike Letter 226J (which penalizes you for not offering coverage), Letter 972CG penalizes you for administrative failures regarding the paperwork itself.
The Trigger:
- Lateness: You filed your Forms 1094-C/1095-C after the mandatory deadlines (typically February 28 for paper or March 31 for electronic filing).
- Inaccuracy: Forms were submitted on paper in an incorrect format.
The Risk: The penalty is calculated per return and operates on a tiered structure based on how late the forms are filed. Additionally, employers are typically hit with a “double penalty” — one for failing to file with the IRS (IRC 6721) and one for failing to furnish the form to the employee (IRC 6722).
- Tier 1 (Within 30 days late): $60 per form.
- Tier 2 (After 30 days, but by August 1): $130 per form.
- Tier 3 (After August 1 or not filed): Maximum penalty (up to $340 per form for the 2025 tax year).
Example Calculation (Two Months Late): If you filed 1,000 forms two months late, you fall into Tier 2. The proposed penalty would be $130 (for failing to file) plus $130 (for failing to furnish), equaling $260 per employee. Your proposed penalty would be $260,000.
The Strategy: You have 45 days to respond to Letter 972CG. You can dispute the penalty by proving:
- Reasonable Cause: The delay was due to events beyond your control (e.g., natural disaster, fire, significant system failure), and you acted in a responsible manner.
- Timely Correction: You exercised due diligence to correct formatting or TIN errors promptly after being notified.
The Strategy: You have 45 days to respond to Letter 972CG. You can dispute the penalty by proving:
- Reasonable Cause: The delay was due to events beyond your control (e.g., natural disaster, fire, significant system failure).
- Reducing penalty: If the form counts used by the IRS for the calculation are inflated, you may be able to reduce the total penalty by recalculating on the true form count
How Can Trusaic Help with Letter 226J Penalties?
An IRS Letter 226J assessment is not a final bill — it is a preliminary proposal. In our experience, the vast majority of these multi-million dollar assessments are triggered by data reporting inconsistencies — missing codes, unrecorded waivers, or payroll gaps — rather than actual non-compliance.
Trusaic’s IRS Penalty Response Service handles the entire defense process for you. We act as your advocate, taking the burden of the audit off your team. Our team performs a forensic analysis of your monthly payroll and benefits data to identify the specific errors that triggered the penalty. We reconstruct the accurate compliance history, generate the required dispute documentation, and manage the correspondence with the IRS.
We’ve saved our clients more than $1 billion in penalties, with many achieving reductions of 90% or more. Don’t let a data error become a financial crisis — contact us to verify your liability and eliminate unjustified penalties.