IRS Disallows Dubious Employee Retention Credit Claims, Sends Notifications to Over 20,000 Taxpayers

Internal Revenue Service (IRS)

The Internal Revenue Service (IRS) has begun sending out more than 20,000 letters to taxpayers indicating that their Employee Retention Credit (ERC) claims have been disallowed. This move is part of the IRS’s ongoing effort to combat fraudulent ERC claims, specifically those made by entities that did not exist or did not have paid employees during the period of eligibility.

This action comes as the IRS ramps up its scrutiny of ERC claims due to misleading marketing campaigns that have targeted small businesses and other organizations. The IRS is set to unveil a voluntary disclosure program later this month, which will allow those who received questionable payments to avoid future IRS action.

An initial review conducted by the IRS this fall found that a significant number of taxpayers did not meet the basic criteria for the credit. Starting this week, ineligible taxpayers will begin receiving copies of Letter 105 C, Claim Disallowed.

This batch of letters will target taxpayers who claimed the ERC but were ineligible either because their entity did not exist or they had no employees during the time period when the credit was claimed.

IRS Commissioner Danny Werfel commented on the situation, stating, “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.” He added that more letters, including both disallowance letters and letters seeking the return of funds erroneously claimed and received, would be sent out in the near future.

Werfel also urged those who submitted a claim to review the rules with a trusted tax professional and consider withdrawing their pending claim or using the upcoming disclosure program to repay improper refunds and avoid future action.

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Following concerns about aggressive ERC marketing from tax professionals and others, the IRS announced a moratorium on processing new ERC claims through at least the end of 2023. The IRS emphasized that enhanced compliance reviews of existing claims submitted before the moratorium are critical to protect against fraud and to shield businesses and organizations from penalties or interest payments stemming from bad claims.

The ERC is a refundable tax credit intended for businesses that continued paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or experienced a significant decline in gross receipts during the eligibility periods.

In July, the IRS announced a shift in focus to review ERC claims for compliance concerns, intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS currently has hundreds of criminal cases being worked, and thousands of ERC claims have been referred for audit.

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