IRS aggressively attacks improper Employee Retention Credit claims

As part of its continuing efforts to combat questionable Employee Retention Credit claims, the Internal Revenue Service is sending an initial round of more than 20,000 letters to taxpayers notifying them of disallowed ERC claims. The agency is disallowing claims for entities that did not exist or did not have paid employees during the period of credit eligibility.

The letters are being sent as the IRS continues increased scrutiny of ERC claims in response to misleading marketing campaigns that have targeted small businesses and other organizations. The IRS mailing is the latest in an expanded compliance effort that includes a special withdrawal program for those with pending claims who realize they may have filed an inaccurate tax return. Later this month, a separate voluntary disclosure program will be unveiled allowing those who received questionable payments to come in and avoid future IRS action.

After an initial review this fall, the IRS determined that a large block of taxpayers did not meet basic criteria for the credit. Starting this week, taxpayers who are ineligible for the credit will begin receiving copies of Letter 105 C, “Claim Disallowed.”

This group of letters will cover taxpayers who are ineligible for the ERC, either because their entity did not exist or because it did not have employees for the time period when the credit was claimed.

Key points for tax pros and their clients

The initial batch of letters focuses on entities that didn’t exist or didn’t have employees during the eligibility period.

Taxpayers who receive a disallowance letter have the following options: either respond with documentation to support their eligibility or claim amount, or file an administrative appeal.

More letters are coming soon. This is just the first wave, so expect additional disallowance letters and requests for information.

A voluntary disclosure program is coming later this month for those who received ERC payments but are concerned about their eligibility.

The special withdrawal program is still open. Until the end of the year, taxpayers can withdraw pending claims without penalty. If you have clients who are waiting for a pending claim and want to withdraw, make sure to check out the withdrawal program.

Review the ERC rules with your clients to confirm their eligibility, and be cautious of aggressive marketing. Misleading information still circulates, so urge your clients to be wary.

Clients should check their mailboxes for Form 105 C and respond within the timeframe if they disagree with the disallowance.

They should also consider withdrawing any pending claims. This is an option if they’re unsure about their eligibility.

They should participate in the voluntary disclosure program if they’ve already received payments and have concerns.

Clients should seek professional advice and stay in touch with you to ensure compliance and avoid penalties. They should also send you any marketing materials attempting to provide them with ERC claim assistance before taking any action.

Future expectations

Anticipate increased IRS scrutiny of ERC claims. Expect more audits and investigations, and penalties and interest for ineligible claims.

The IRS will continue to send out disallowance letters to ineligible ERC claimants. The agency may request more information from taxpayers to support their ERC claim.

The IRS will be announcing a voluntary disclosure program for taxpayers who have already received questionable ERC payments. To help tax pros and taxpayers understand eligibility requirements, the IRS is developing more clear and concise ERC guidance.

The IRS has been shifting its focus since July to review ERC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The agency has hundreds of criminal cases being worked on, and thousands of ERC claims have been referred for audit.

It’s crucial for accounting firms and tax professionals to stay informed about the latest developments regarding the ERC and advise their clients accordingly. By being proactive and taking advantage of available programs, clients can avoid costly mistakes, which include penalties and interest, and ensure compliance with IRS regulations.

For more information on ERC eligibility, the IRS encourages tax pros and taxpayers to see the ERC frequently asked questions and the ERC Eligibility Checklist, which is available as an interactive tool or as a printable guide.