Got Letter 5699 instead? That’s a different letter with a different fix →
If Letter 226‑J just arrived, you have a real deadline and a real dollar figure attached to it. Here’s the part that doesn’t come through in the panic: the penalty amount is a proposal, not a bill — and it can be successfully disputed far more often than its tone suggests.
What triggers it
Letter 226‑J exists because of a data match. Each year the IRS compares what Applicable Large Employers (ALEs) reported on Forms 1094‑C/1095‑C against who actually received a premium tax credit (PTC) buying coverage on a Health Insurance Marketplace. If that data shows a full-time employee got a PTC in a month your 1095‑C says they were offered qualifying coverage — or weren’t offered coverage at all — it becomes a proposed penalty.
It rarely arrives fast. IRS enforcement typically runs 12 to 18 months or more behind the filing year, so a letter about tax year 2024 can land in 2026, for a filing season you may barely remember the specifics of.
The two penalty types
The proposed payment is one of two kinds, and they work very differently — the 2026 amounts below:
§4980H(a) — the sledgehammer
You didn’t offer minimum essential coverage to at least 95% of full-time employees for the month, and at least one of them got a PTC.
$3,340 / FT employee / year
Calculated across your entire full-time headcount minus the first 30 — not just the employee who triggered it. 1/12 of the rate applies per affected month.
§4980H(b) — the tack hammer
$5,010 / affected employee / year
Calculated only against the employees actually flagged, not your whole headcount. Same monthly proration.
The two don’t combine, and the (b) penalty is capped so an employer who offered imperfect coverage never ends up owing more than one who offered no coverage at all.
Reading the ESRP summary table
The letter’s core exhibit is a month-by-month table. For each of the twelve months, it shows whether the IRS’s data indicates you failed the 95% offer test under (a), and separately, how many employees are flagged under (b) for that month. The total at the bottom is for the full year.
That’s the first thing worth checking — not whether the total looks alarming, but which specific months and which specific employees are actually driving it. A number that reads like it covers your whole workforce can be sitting on top of two employees in one quarter.
The response: Form 14764, Form 14765, and the clock
Respond by the date printed on the letter, not the day you open the envelope. That used to mean 30 days. A 2024 law requires the IRS to allow at least 90 days from the first letter for newer assessments, but the date on your letter is the one that counts. Missing the deadline doesn’t make the letter go away; the IRS simply moves forward, assesses the proposed amount, and appealing becomes more difficult.
- Form 14764 (ESRP Response) — states whether you agree or disagree with the proposed payment, in whole or in part.
- Form 14765 (PTC Listing) — where the actual argument happens if you disagree: employee by employee, showing which of the IRS’s assumptions are wrong and why — coverage that was in fact offered, an affordability safe harbor that applies, an employee who wasn’t full-time that month.
Line-by-line 14765 strategy — which employees are worth contesting and what documentation actually moves the number — is its own guide. This one is about getting the response filed correctly and on time.
What happens after you respond
The IRS replies with one of six Letter 227 variants, and they don’t all mean the same thing:
- 227‑K
Reduced to zero. Your documentation resolved it. Case closed.
- 227‑J
Assessed as agreed. You signed off on the proposed amount. Case closed.
- 227‑L
Revised. The IRS changed the number based on what you sent. You can agree, or request a meeting with the manager or IRS Office of Appeals.
- 227‑M
Unchanged. The IRS reviewed your response and kept the original number. Same options: agree, or escalate.
- 227‑N
Appeals decision. Reflects the outcome after escalation. Case closed.
- 227‑O
Same process, routed for tax-exempt and government entities.
A 227‑L or 227‑M isn’t a final bill — it’s an invitation to escalate if the number is still wrong.
Why disputes so often succeed
The letter comes out of a data match, and data matches are frequently wrong for reasons that have nothing to do with whether you actually complied. Two patterns account for most of it:
Tried to comply, made a reporting mistake
The offer was real and the coverage was there — but an unfamiliar code, a data-entry slip, or a misread Line 14/16 combination made the 1095‑C say something different from what actually happened. Once the correct facts are documented, the letter is arguing with a typo, not a real compliance gap.
Did everything right
Affordable, minimum-value coverage offered to every full-time employee, correctly filed — and an employee signed up on the exchange anyway and claimed the credit, sometimes without realizing they weren’t eligible once employer coverage was on the table. The data match doesn’t know that when the letter goes out. Your documentation is what tells it.
In practice, a well-documented dispute frequently results in a completely rescinded or significantly reduced penalty. Reading the number as a bill and paying it can be a costly mistake, and those who ignore the notices fare worst of all.