Understanding IRS Letter 226-J and ESRP

IRS Letter 226-J opens with one sentence:

"We have made a preliminary calculation of the Employer Shared Responsibility Payment (ESRP) that you owe."

Below it sits a dollar figure, usually a large one, and a response date generally 30 days out. What the letter doesn't make obvious is that the number is a proposed assessment, not a final bill.

Why do we owe this? Is the figure even right? What happens if we miss the response date?

Our ACA specialist have years of experience investigating and responding to these letters. We've removed more than $5.8 million in proposed penalties for our clients: close to 90% of everything assessed against them.

The Three Errors

In many cases, the proposed penalty assessment is due to a reporting error, not necessarily because an employer did not offer coverage.

A miscounted headcount cost one employer $800,000

The IRS builds your ESRP from the full-time employee counts you reported on Forms 1094-C and 1095-C. Count wrong and the exposure compounds monthly, across every full-time employee you claimed.

One client reported theirs incorrectly across two separate years. We corrected both filings. The IRS assessed nothing.

One unchecked box, $200,000

The offer-of-coverage and safe harbor codes on Form 1095-C tell the IRS whether coverage was offered and whether it was affordable. A blank where a code belongs reads as no coverage offered.

One client left a single box empty. We found it, documented the coverage that had in fact been offered, and closed the case in under two weeks with nothing owed.

Twenty entities read as one, $544,000 back

A client operating 20 separate businesses received a $550,000 proposal built on filings that misstated how those entities related to one another. Controlled group structure changes which employees count, and against whom.

We rebuilt the structure for the IRS and documented each filing. Final liability: $6,000.

Why the Figure may be Incorrect

The proposed ESRP is built from two things: what you reported on Forms 1094-C and 1095-C, and which of your employees claimed a premium tax credit on their individual returns. Nobody checks that reporting against what actually happened. Not the IRS, not your payroll provider.

We do. Line by line through Form 14765, the Employee Premium Tax Credit Listing that arrives with your letter, employee by employee and month by month, matched against payroll records and evidence of the coverage you offered.

Most of the employees on that list turn out to have been offered coverage. Proving it is the work.

The Response Date

Your letter carries a response date, generally 30 days from the date printed on it. Past that point, your best opportunity to correct the record is behind you.

If the date is close, call before you gather anything. The IRS prints a phone number at the top of Form 14764 for employers who need more time, and that request lands better early than late.

Received IRS Letter 226-J? Here’s What to Do Next

IRS Letter 226-J is the IRS's initial proposal that an employer may owe an ACA Employer Shared Responsibility Payment. But receiving the letter doesn't necessarily mean you owe the proposed penalty. Employers have an opportunity to review the IRS's findings, correct reporting errors, and challenge the assessment when appropriate.

Learn more about what IRS Letter 226-J means, why you may have received it, and how to respond before taking your next steps.

Contact Us if You Receive IRS Letter 226-J

If you’re staring down IRS letter 226-J, know you’re not alone—many businesses receive this unpleasant surprise in the mail. Contact James Moore’s HR Solutions Team for a complimentary review of your situation.

Need help minimizing or eliminating your ACA penalty?

Contact us today for a free assessment!

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Jay Hutto, CPA, ABV, CFF, CVA

Partner

As a CPA in the state of Florida, Jay has more than 30 years of experience providing personalized accounting services including auditing and tax services, business consulting, business valuations and litigation support. While he has worked with clients representing the real estate, manufacturing, professional services, dealership and retail industries, he has significant experience addressing issues and providing solutions for healthcare-related entities. As such, Jay leads the firm’s Healthcare Segment Team. Jay helps his clients maximize revenue and minimize expenses, and he is dedicated to providing them peace of mind that they’re getting the best possible tax savings. His guidance helped one client avoid a $1,000,000 tax liability with a cost segregation study, and he helped another client eliminate a $50,000 IRS tax penalty. He also takes a proactive approach to revenue enhancement, cost controls,  applying best practices, and emphasizing the importance of having the right policies and procedures already in place (instead of as a reactive remedy) to best facilitate business growth. Jay also specializes in preparing business valuations and litigation support services and has earned several accreditations including the Accredited in Business Valuation (ABV), Certified in Financial Forensics (CFF) and Certified Valuation Analyst (CVA) designations. Litigation support services include related party transactions, fraud, child support, divorce and dispute resolution.
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Kevin Golden, CPA

Partner

Kevin has over 10 years of experience in the accounting industry. He is responsible for every aspect of client management including tax preparation, planning and correspondence. He enjoys building relationships with his clients as he helps them understand everything from basic economic terms to complicated tax issues. Kevin also supervises tax accounting staff members and reviews tax returns prepared by the firm.

While his work covers a variety of industries, Kevin’s focus is manufacturing clients. He serves as a member of the firm’s Manufacturing Services team and is a co-host of Moore on Manufacturing, our monthly video series addressing the business concerns facing manufacturing companies. He also presents regularly to professional groups in the community on tax-related issues.

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Julie Kniseley, SHRM-SCP

President, HR Solutions

With over 30 years of strategic human resources leadership, Julie brings a wealth of experience in driving organizational success through innovative HR strategies. Throughout her career, she has worked extensively across all facets of human resources, including workforce planning, organizational design, talent management, mergers and acquisitions, employee relations and compliance. Her deep expertise in aligning HR initiatives with business goals has helped organizations optimize workforce structures, enhance employee engagement, and achieve sustainable growth.

As leader of the James Moore HR Solutions team, Julie has partnered with businesses across industries to tackle critical workforce challenges, leveraging data-driven insights and best practices to deliver measurable results. Recognized as a thought leader in the field, she has shared her expertise on national panels including ITEXPO, FABTECH, and Concierge Medicine and podcasts like Accelerate Your Business Growth. She speaks on the importance of preparing organizations and their people for the future of work: integrating technologies like AI into workflows and skillsets while preserving the human connection and safeguards needed for a sustainable path forward.

In 2026, Ragan Communications named Julie an HR Communicator of the Year in their annual Top Women in HR competition. She is a member of the Society for Human Resources Management (SHRM) and is a certified SHRM Senior Certified Professional.

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