IRS Form 14764 & 14765 | ESRP Penalty & How to Complete & Respond

Wiggam Law - Affordable Care Act

If your business wasn’t compliant with the Affordable Care Act, you may receive Letter 226-J and Forms 14764 and 14765. The letter explains the proposed penalties, while the forms help you draft your response. The penalties can be expensive, so you should respond to the letter promptly and accurately to ensure you don’t face any unnecessary costs.

Here’s everything you need to know about Forms 14764 and 14765, Letter 226-J, and how to respond to each.

What is IRS Form 14764?

Form 14764, also known as an ESRP response, plays a crucial role in the Affordable Care Act (ACA) Employer Shared Responsibility Payment (ESRP) process. This form is designed for employers to respond to IRS Letter 226-J, which notifies businesses of potential liability for the ESRP based on their compliance with ACA regulations.

In short, the primary purpose of Form 14764 is to provide employers with an easy way to communicate their agreement or disagreement with the proposed penalty outlined in the IRS letter.

Key Sections of IRS Form 14764 & How to Complete

Letter 226-J only proposes penalties against you. If you want to ensure that the penalties are not assessed, you must complete Form 14764 as soon as possible. On the form, you can indicate if you agree with the penalties in full, disagree in full, or need to suggest modifications.

The first section of the form requires your contact information, including your full name, address, primary and secondary phone numbers, and the best time to call. Then, complete the rest of the form based on your situation.

If You Agree

If you agree with the proposed assessment on your Letter 226-J, all you need to do is check the box under “Agreement with proposed assessment” to consent to the assessment and collection of the ESRP in the amount stated on the form. Next, sign, date, and print your full name and send it to the address on the envelope provided.

If You Disagree

If you disagree with the proposed assessment on your Letter 226-J, check the box under “Partial/Total disagreement with proposed assessment.” Next, the form asks you to indicate your payment option. Options include:

  • Full payment using EFTPS (Electronic Federal Tax Payment System) and the date of the payment.
  • Partial payment using EFTPS and the date of payment.
  • Enclosed full payment and payment amount.
  • Enclosed partial payment and payment amount.
  • No payment.

Your response must also include supporting documentation, including a signed statement explaining why you disagree with part or all of the ESRP, and describe any changes to the information reported on Form(s) 1094C or 1095C that may have resulted in an incorrect assessment. You will also need to provide supporting documents for the statement. You may use Form 14765 to calculate changes to the proposed penalty assessment.

What is IRS Form 14765?

IRS Form 14765, also known as Employee Premium Tax Credit (PTC) Listing, details the name and shortened social security number of each full-time employee you filed Form 1095-C for if:

  • The employee was allowed a PTC on their income tax return for one or more months in the tax year stated in your Letter 226-J.
  • You didn’t report an affordability safe harbor or other ESRP relief on the employee’s 1095-C for one or more months, but the employee was allowed a PTC.

Each monthly box on the Employee PTC Listing contains two rows. The first row shows the codes entered on lines 14 and 16 of the employee’s Form 1095-C for each month. If a month is not highlighted, the employee is considered full-time and subject to assessment. The highlighted month indicates that the individual is not an assessable full-time employee for that month.

Under the ACA, employer-sponsored health coverage is considered affordable if the employee’s required contribution for self-only coverage does not exceed a certain percentage of their household income. If the coverage is deemed unaffordable, the employee may qualify for premium tax credits, and if that happens, the employer may be assessed the Employer Shared Responsibility Payments.

What is an Affordability Safe Harbor?

There are three Affordability Safe Harbors that employers can use to determine whether their coverage meets the affordability standard:

  • W-2 Wages Safe Harbor: The employee’s required contribution for self-only coverage is considered affordable if it does not exceed 9.5% of the employee’s W-2 wages from that employer for the calendar year.
  • Rate of Pay Safe Harbor: The employee’s required contribution for self-only coverage is considered affordable if it does not exceed 9.5% of the employee’s monthly rate of pay as of the first day of the coverage period.
  • Federal Poverty Line (FPL) Safe Harbor: The employee’s required contribution for self-only coverage is considered affordable if it does not exceed 9.5% of the federal poverty line for a single individual in the applicable location and calendar year.

How to Accurately Complete and Amend Employee Information

Here’s a step-by-step guide on how to make changes to the Employee PTC Listing:

  • To correct inaccurate or incomplete information on an assessable full-time employee’s Form 1095-C, use the indicator codes for lines 14 and 16 as provided in the Instructions for Forms 1094-C and 1095-C. Update employee codes on the second row of each monthly box as needed.
  • To make the adjustments, first enter the indicator code for line 14 and then for line 16, separating the codes with a slash.
  • If the same indicator code applies to all 12 months of the calendar year, enter it in the “All 12 Months” column and skip entries for individual months.
  • If you’re providing further information about an employee’s changes, check the “Additional Information Attached” option. Otherwise, leave the column blank.

How to Respond to IRS Letter 226-J

If you’ve received Letter 226-J, make sure to review the letter carefully as it explains the proposed ESRP and what you need to do if you agree or disagree. The letter will also include a response date.

If You Agree

If you agree with the proposed ESRP on your Letter 226-J, you will need to:

  • Complete Form 14764 and return it to the IRS by the response date on your letter.
  • Include your payment, or if enrolled in the EFTPS system, you can pay electronically.
  • Send your Form 14764 and payment to the address on the attached envelope.

If You Disagree

If you disagree with the proposed ESRP on your Letter 226-J, you will need to:

  • Complete Form 14764 following the instructions above.
  • Include a signed statement that explains why you disagree with the proposed ESRP.
  • Include any documentation that supports your statement.
  • If applicable, include in your statement any changes you want to make to the information on your Forms 1094/1095-C.
  • Make the changes on your Form 14765, following the instructions above.
  • Send your Form 14764, supporting documentation, signed statement, and, if necessary, your Form 14765 to the address shown on the attached envelope.

What Happens if You Ignore IRS Letter 226-J?

Ignoring IRS Letter 226-J can have serious consequences for employers subject to potential ACA penalties. If you choose to disregard this letter and fail to respond by the specified deadline, several outcomes may occur.

Firstly, the IRS may proceed with assessing the proposed penalties based on the information available to them, leading to financial liabilities. These penalties can be significant and may accrue interest over time. Additionally, continued non-compliance with ACA requirements can result in further enforcement actions by the IRS, such as additional penalties, fines, or even legal action.

What is Letter 227?

Letter 227 is a follow-up correspondence issued by the IRS to employers who have previously received Letter 226-J regarding potential Affordable Care Act (ACA) penalties. Letter 227 serves as a response to your submission of Forms 14764 and 14765 in response to Letter 226-J. In short, it provides further clarification, adjustments, or resolutions to the proposed ACA penalty assessments outlined in Letter 226-J.

Understanding The Different Types of Letter 227

Here’s a breakdown of the various versions of IRS Letter 227.

Letter 227-J

Letter 227-J is the letter the IRS sends when they acknowledge they received your signed agreement to the proposed penalties and the penalties will be assessed.

Letter 227-K

Letter 227-K is issued if you respond to Letter 227-J and the IRS agrees you are not subject to any penalties and the proposed balance has been reduced to zero.

Letter 227-L

Letter 227-L serves as an acknowledgment of your response to Letter 226-J and that the IRS  has revised your proposed penalty.

Letter 227-M

Letter 227-M is issued when the IRS receives your response to the 226-J letter but does not agree with it and they do not change their proposed penalties.

Letter 227-N

Letter 227-N is issued after you have appealed the IRS proposed penalties and appeals has reached their decision.

Common Mistakes and Compliance Tips

Responding to IRS Letter 226-J and subsequent follow-up letters, such as Letter 227, requires careful attention to detail to ensure compliance with Affordable Care Act (ACA) requirements and to avoid potential penalties. Here are some common errors in responding to these letters and best practices for ensuring compliance and avoiding future penalties.

Incomplete or Inaccurate Documentation

Failing to provide comprehensive documentation or submitting inaccurate information in response to IRS inquiries can lead to misunderstandings and incorrect penalty assessments. To substantiate ACA compliance, keep detailed records of employee hours, health insurance offerings, employee contributions, and other relevant information.

Failure to Dispute Inaccurate Assessments

If you believe that the proposed penalties outlined in IRS letters are incorrect, you must provide a timely and thorough dispute supported by relevant documentation and explanations. Always respond to IRS inquiries with organized documentation and explanations, addressing all relevant issues and discrepancies identified in IRS letters.

Lack of Understanding of ACA Requirements

You may make errors in responding to IRS letters due to a lack of understanding of ACA requirements, including eligibility criteria for coverage and affordability standards. Stay informed about ACA regulations and requirements to ensure accurate reporting and compliance with IRS guidelines.

Additional Resources

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Get Help With These Forms Today

Penalties for not complying with the ACA can be very expensive, and if you receive these forms in the mail, you need to respond. If you have received Letters 226-J or any variation of 227 and are unsure how to respond, you should contact a tax attorney.

Need help? If you are concerned about Letter 226-J or Letter 227 and unsure how to respond with Forms 14764 and 14765, call us today at (470) 287-5472 or fill out our consultation form below.

At Wiggam Law, our team of expert tax attorneys can walk you through the answers to your questions and help resolve your tax issues while you focus on running your business. Don’t wait to get help; contact us today to schedule a consultation.

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