Tax Byte

Drama in the ERC – IRS Sends Over 20,000 Disallowance Letters

With so much drama in the ERC, it’s kind of hard being denied eligibility. Of course, we’re talking about the Employee Retention Credit, but if “Gin and Juice” also came to mind, we might be friends.

The IRS announced yesterday that it has sent more than 20,000 letters notifying taxpayers of their disallowed ERC claim. And that’s just round one. The IRS expects to send additional letters as it continues its increased scrutiny of ERC claims in response to numerous marketing campaigns that have targeted small businesses and other organizations.

“With the aggressive marketing we saw with this credit, it’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,” said IRS Commissioner Danny Werfel. “The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received.”

The ERC, originally enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), was created to help businesses pay their employees during the COVID-19 pandemic by establishing a refundable credit against employer taxes.  Although the period of eligibility expired December 31, 2021, generally 2020 claims can be filed until April 15, 2024, and the deadline to file 2021 claims is April 15, 2025.

However, in response to the excessive fraud being seen with the credit, the IRS announced last September a temporary pause for the cause on processing new ERC claims until at least the end of 2023.

Two Problem Areas

The first batch of letters sent by the IRS to taxpayers this week identify two problem areas, which include ineligibility for the ERC because the entity did not exist or did not have employees during the time period for which the credit was claimed. The ERC applies to qualified wages for periods between March 13, 2020, and December 31, 2021, thus entities established after December 31, 2021, are not entitled to the credit. 

Unfortunately, many legitimate ERC claims are also getting caught up in the disallowance mix. The IRS acknowledges that this may be the case and provides taxpayers with related information in the disallowance letter, which explains how the taxpayer can respond with documentation supporting their eligibility or claim amount, or file an administrative appeal.

ERC Withdrawal Program

Additionally, the IRS continues to accept and process taxpayers’ requests to withdraw ERC claims under its “special withdrawal process.” At this time, taxpayers have until at least the end of the year to request a withdrawal.

Essentially, this “oops” option permits the following situations where entities can withdraw their ERC claim submission and avoid future repayment, interest and penalties:

  • certain entities that filed an ERC claim but have not yet received payment; and
  • entities that may have received a refund check but have not yet deposited or cashed it.

ERC claims that are withdrawn will be treated as if they were never filed, according to the IRS. That means no penalties or interest.

Looking ahead, the IRS plans to unveil a separate voluntary disclosure program later this month that will allow taxpayers who received questionable payments to come forward and avoid future IRS action.


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