Published: June 4, 2024

By: Kari Brummond, EA|Reviewed by: Charles P. Corsello, EA

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

IRS Forms 14764 and 14765

The Affordable Care Act set certain requirements and expectations for large employers. Employers with at least 50 full-time employees in the prior year are responsible for providing health insurance options to at least 95% of their workforce. When a qualifying employer does not provide those options, the IRS may send out Letter 226-J. With that letter, you’ll receive Forms 14764 and 14765, which you must fill out and return.

Basically, if you’ve received Letter 226-J, you’re likely on the hook for a penalty for not providing the minimum level of healthcare coverage. It’s important to read the letter and forms you received in their entirety so you can respond appropriately in Forms 14764 and 14765. Looking for personalized assistance with your business tax problems? Browse our tax professional listings to find a tax pro in your area.

Overview of IRS Form 14764, ESRP Response

Form 14764, titled ESRP Response, requires you to respond directly to the information contained within Letter 226-J.

The ESRP Response form is broken down into several key sections. You’ll start by filling out your contact information and then indicating your agreement or disagreement with the IRS’s assessment of the penalty you owe. Stating that you disagree simply means that you disagree in part or full. The next section allows you to choose your payment option. The options include:

Full payment via electronic transfer
Partial payment via electronic transfer
Enclosed full payment
Enclosed partial payment
No payment

The final part of the form allows you to designate someone else to discuss the form with the IRS on your behalf.

Guide to IRS Form 14765, Employee Premium Tax Credit Listing

If employees apply for health insurance coverage through the Marketplace and receive a Premium Tax Credit for doing so, that information may be used to figure out how much the employer owes in penalties. The Employer Shared Responsibility Payment is what a company must pay if they either do not offer coverage or the coverage is unaffordable enough that the employee must seek coverage via the Marketplace.

In 2024, the ESRP equals the number of full-time employees that received the PTC on their tax returns multiplied by 1/12 of the current applicable payment amount. The applicable payment amount is adjusted each year to account for inflation. As of 2024, the annual penalty is $4,460 or $371.67.

Form 14765 includes information about each employee who received a Premium Tax Credit. The form includes all twelve months in the year and indicates which months the employee received the tax credit. The information included in Form 14765 is pulled from the company’s 1094-C or 1095-C, as well as individual employees’ tax returns. The penalty is calculated based on the number of employees receiving the PTC for getting healthcare from the Marketplace.

Note that if you didn't file Forms 1094 and 1095 at all, the IRS may send you CP215. This notice explains the penalties assessed for not filing these returns. Then, once you file these returns, the IRS may proceed to assess a shared responsibility payment if needed.

How to Complete and Amend Employee Information

Again, the information included in your Form 14765 is based on the company’s employees’ tax returns, as well as the company’s 1094-C and 1095-C forms. If you disagree with the calculations included in the form, you have to indicate the changes that should be made. At the end of each employee’s row on Form 14765, there is a checkbox that you can mark if you have additional information to include. On a separate piece of paper, you can specify what changes need to be made for each row. For example, if you believe you qualify for safe harbor or some other form of relief from the ESRP, you may include your calculations and reasoning.

The Process of Responding to IRS Letter 226-J

While receiving Letter 226-J, Form 14764, and Form 14765 can be overwhelming, these forms have everything you need to decide how you want to respond to the IRS’s claims and calculations.

First, read everything carefully. The documentation explains how the IRS reached its decision and determined your ESRP. Form 14764 is relatively short; you simply mark how you are paying (if you are making a payment) and indicate whether you agree or disagree with the assessment.

The work in proving why you disagree comes with Form 14765. You can break down your calculations by disputing the information included for each employee who received the Premium Tax Credit. If you believe you should have qualified for safe harbor or some other form of relief for any of the employees or months marked, you can provide your reasoning in a sheet attached to Form 14765. Check the response date listed in Letter 226-J carefully and make sure you have everything submitted by the response date.

Upon submitting your paperwork indicating your disagreement with their assessment, the IRS will send you an acknowledgment letter—some form of Letter 227—to indicate that they have received your communication and reached a final decision.

Introduction to IRS Letter 227

After the IRS receives your completed Forms 14764 and 14765, they will process the information you’ve included and decide the next steps. Depending on the outcome of the inquiry, they may send you Letter 227-J, -K, -L, -M, -N, or -O. Read the letter carefully to understand what changes were made (if any) and what your obligations are at this point.

Each variation of Letter 227 is slightly different, so it’s crucial to read it carefully and discuss it with your tax attorney.

227-J - If you agreed with the ESRP assessment made by the IRS, there is nothing further for the IRS to do. They will send 227-J to you, verify that the ESRP will be assessed, and close the case.
227-K - If you disagreed with the assessment made by the IRS and sent back evidence proving your calculations, they will send Letter 227-K if they agree with your calculations. The letter states that they received your information and reduced your ESRP to zero.
227-L - Letter 227-L is similar to 227-K in that the initial assessment sent by the IRS was not correct. However, the information you provided did not bring your ESRP down to zero. It did, however, revise it. With 227-L, you’ll receive an updated version of Form 14765 showing the new calculation table. You can either agree with the new calculation, appeal the decision, or request a meeting with the manager.
227-M - If the information you provided to back up your disagreement with the ESRP assessment was inaccurate, the IRS will send 227-M indicating that there is no change in your ESRP. You may either agree with the assessment, appeal or request a meeting with the manager.
227-N - If you appealed a decision made by the IRS, they send Letter 227-N after closing the appeals process. The letter contains the ESRP you owe based on the appeal.
227-O - Letter 227-O is nearly identical to 227-L. However, it is sent to tax-exempt and government entity customers.

Navigating the Letter 227 Response Process

Letters 227-J, -K, and -N do not require any response. If you receive Letter 227-L, -M, or -O, you should respond promptly after receiving the IRS’s response.

If You Disagree With the Letter

If you disagree with the IRS’s decision again, you can pursue an appeal or request a meeting or conference with the supervisor of the contact person listed on your 227 letter. If you want to skip the supervisor meeting or the supervisor meeting does not result in any change to your ESRP, you can request a conference with the Office of Appeals.

Before reaching out to the IRS, you may want to verify that the apparent error in your ESRP is not the result of your own miscalculation or mistake. For example, you may have discovered errors on Forms 1094-C and 1095-C for the year in question. In this scenario, you would need to correct your ACA reporting errors.

How to Amend 1094-C and 1095-C

If you realize there are mistakes on Forms 1094-C and 1095-C, you can amend them. If you submitted 1094-C, you can fill out a new 1094-C and mark the “CORRECTED” checkbox at the top of the form. You then submit that to the IRS.

If you filed 1095-C, fill out a new 1095-C and mark the “CORRECTED” checkbox. You must also file a Form 1094-C but do not mark the “CORRECTED” checkbox on this form. You must then submit a copy of the corrected form to the employee.

Note, though, that Letter 226-J states that you should not file corrected forms if you have already received notice of an assessed penalty. You should list your necessary changes on the forms you submit in response to 226-J.

If You Agree With the Letter and Want to Pay

You can fill out Form 14764 indicating your agreement with their assessment. You should also send a check or money order for the amount you owe; you may also utilize the Electronic Federal Tax Payment System if you are enrolled.

If You Agree With the Letter But Cannot Pay

This is the point at which you should consult with a tax attorney, CPA, or enrolled agent. The IRS will begin collection actions against you if you do not pay the ESRP in the timeframe indicated in your letter. However, businesses do have access to a range of payment options. An installment agreement may allow you to spread out your ESRP over multiple payments. Other options may be available, depending on the financial status of your business. It’s important to act quickly to avoid extra penalties and more aggressive collection actions against your business.

Deadlines and Implications of Different Responses

At the top of your Letter 227, you’ll find a response date. You must respond to the IRS by this date. In the absence of a response, the IRS will assess the amount shown in the letter as if you had agreed with it.

If you agree with the letter and submit Form 14764 indicating as such, know that you now owe the ESRP listed in your letter. If you disagree, you may have multiple options to challenge or appeal the decision before you run out of options.

Common Mistakes and Compliance Tips

The ACA paperwork required of employers is complex, and it’s easy to make mistakes if you’re unfamiliar with it. Double-checking your filings can help you avoid heavy penalties.

Some of the most common mistakes resulting in ESRPs include:

Overstating employee count: There are multiple ways to determine your employee count, and if you report your numbers incorrectly, you could be assessed stiff penalties for failing to provide necessary coverage. In some cases, overstating your employee count could tip you into ALE territory when you really shouldn’t be there. Also, keep in mind that you don't have to count employees who receive health insurance through the military when counting your full-time and full-time equivalents.
Minimum essential coverage: If you offered minimum essential coverage to 95% of your employees for the year in question, make sure that you checked the “All 12 Months” box on 1094-C. If you do not check this, even though you did offer coverage all year long, you may accidentally be assessed penalties for certain months.
Code mistakes: The codes on Form 1095-C determine when an employer may be subject to penalties. You should double-check Lines 14, 15, and 16 with a tax professional to ensure you are providing the right information to the IRS.

Ensuring Compliance to Avoid Future Penalties

Thorough documentation of your employment numbers, insurance plan offerings, insurance-eligible workers, hours worked for all qualifying employees, and enrollment information can help you avoid unnecessary ACA penalties. Since this is a complicated area of tax law that can have significant implications for the profitability of your business, it’s worth discussing ongoing compliance efforts with a tax professional.

FAQs and Additional Resources

How does an employer determine which type of IRS Letter 227 they have received and the next steps required?

When you receive Letter 227, the bottom right-hand corner will state which variation of Letter 227 you have received. The next steps are clearly laid out under the header “What you need to do.” In some cases, you do not have to do anything; in others, you must agree or disagree and submit the appropriate paperwork.

What are the key differences between the various versions of Letter 227 and how do they impact the employer’s ACA compliance status?

There are significant differences between the different types of Letter 227. Some indicate that the IRS agrees with your submission and has either reduced your ESRP or completely eliminated it. In other cases, the letter may notify you that their initial assessment stands. If your ESRP was reduced to zero, that essentially means you were compliant with ACA requirements but likely had errors in your initial paperwork or tax filings.

Can an employee appeal the IRS’s decision if they disagree with the outcome outlined in Letter 227?

Yes. Letter 227 provides your next steps if you disagree. You can either request a conference with the supervisor of the contact person listed in your letter or a conference with the Office of Appeals.

What are the best practices for employers to avoid receiving Letter 226-J and, subsequently Letter 227 from the IRS?

Employers should keep thorough documentation regarding their employees’ work hours, eligibility for benefits, enrollment in benefit plans, and communication with the IRS. Working with a tax professional is often helpful since compliance requires substantial tracking and documentation.

How should employers document their responses to IRS Letters 226-J and 227 for future reference and compliance audits?

Per the IRS, you should keep copies of all letters and documents you submit to the IRS.

IRS Resources

The IRS offers a wide range of publications to help employers understand their obligations and options regarding ACA compliance. Useful resources to explore include:

A thorough understanding of ACA requirements is essential for applicable large employers (ALEs). This can be a challenge for companies as they transition from a small employer that does not have to abide by ACA requirements to a large company that must be compliant with ACA requirements. Many problems can be solved by correctly filling out Forms 1094-C and 1095-C. If you run into issues with compliance, proper handling of your IRS letters and forms can help you address these problems in a timely manner.

For those struggling to understand their obligations as an employer or their next steps after receiving Letter 226-J, it’s helpful to work with a tax professional who can help you address your current concerns and set you up for future compliance. Use our tax pro listings to find a tax professional in your area.

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