Understanding the IRS’s Latest Actions on Employee Retention Credit Claims

The Internal Revenue Service (IRS) is taking significant steps to address questionable claims related to the Employee Retention Credit (ERC). In a move to safeguard the integrity of this program, the IRS has begun mailing over 20,000 disallowance letters to entities that have filed for the ERC but still need to meet the essential criteria.

What is Happening?

Increased Scrutiny: The IRS is actively reviewing ERC claims, especially those targeting small businesses and other organizations, following numerous misleading marketing campaigns. This scrutiny is part of an expanded compliance effort by the IRS.

Disallowance Letters: Taxpayers who have filed ineligible ERC claims will receive Letter 105 C, indicating the disallowance of their claim. This primarily affects entities that did not exist or had no employees during the eligible period.

Voluntary Disclosure Program: A forthcoming program will enable entities that have received questionable ERC payments to disclose this and avoid future IRS actions voluntarily.

Why is This Important?

The IRS’s actions are crucial to prevent improper payments and ensure that only eligible entities benefit from the ERC. The credit’s intent is for businesses that continued to pay employees during the COVID-19 pandemic amidst operational disruptions or significant declines in gross receipts.

What Should Affected Taxpayers Do?

If you receive a disallowance letter and disagree with the IRS’s decision, you can respond with supporting documentation or file an administrative appeal.

What’s Next?

The IRS plans to send more letters and introduce a special voluntary disclosure program related to ERC claims. This is part of a broader effort to review and verify the legitimacy of all ERC claims.

Reminder for Taxpayers

Withdrawal Option: Taxpayers still have time to withdraw their pending ERC claims to avoid future repayments, interest, and penalties. This option is particularly useful for those who might have been misled into filing ineligible claims.

Caution Advised: Given the ongoing aggressive marketing and scams related to the ERC, taxpayers are urged to exercise caution and consult with trusted tax professionals before applying.

For more details on ERC eligibility and to use resources like the ERC Eligibility Checklist, visit the IRS’s website or consult with a tax expert (Book an appointment link).