IRS Ramps Up Efforts Against Aggressive Employee Retention Credit Claims

In a concerted effort to address questionable Employee Retention Credit (ERC) claims, the Internal Revenue Service (IRS) has sent over 20,000 letters to taxpayers, informing them of disallowed ERC claims. These notifications pertain to entities that either lacked existence or failed to maintain paid employees during the stipulated eligibility period, intended to prevent improper disbursement of ERC funds to ineligible entities.

This correspondence is a pivotal aspect of the IRS's heightened vigilance over ERC claims, responding to misleading marketing endeavors predominantly targeting small enterprises and other organizational entities. The IRS's proactive mailing represents the latest stride in an expanded compliance endeavor, encompassing a specialized withdrawal program for entities with pending claims that may acknowledge potential inaccuracies in their tax filings. Subsequently, a distinct voluntary disclosure program is set for unveiling, affording recipients of questionable payments the opportunity to rectify their position and preempt IRS repercussions.

Following an initial review conducted this fall, the IRS identified a considerable cohort of taxpayers who failed to meet fundamental eligibility prerequisites for the credit. Commencing this week, individuals ineligible for the ERC will commence receipt of Letter 105 C, denoting Claim Disallowed.

These communications target taxpayers deemed ineligible for the ERC due to either the nonexistence of their entity during the claim period or the absence of employees during the credit-qualifying duration.

IRS Commissioner Danny Werfel remarked on the unsurprising occurrence of claims significantly deviating from the statutory requirements owing to the aggressive marketing maneuvers surrounding this credit. The current action signifies an initial phase in the IRS's compliance undertakings in this realm, with further correspondence slated for distribution in the near term—comprising both disallowance notifications and requests for the return of erroneously claimed and received funds.

"As we persist in our audit and criminal investigation pursuits related to the Employee Retention Credits, we strongly urge individuals who have submitted claims to scrutinize the regulations in consultation with proficient tax professionals. Should an inaccurate claim have been filed, we encourage them to contemplate withdrawing their pending claim or utilizing the impending disclosure program to reimburse improperly obtained refunds and avert future IRS actions," Commissioner Werfel iterated.

Subsequent to concerns regarding aggressive ERC promotion by tax professionals and other entities, the IRS announced a moratorium on processing new ERC claims, effective at least until the conclusion of 2023. Emphasizing the necessity for heightened compliance scrutiny over pre-existing claims preceding the moratorium, the IRS aims to stave off fraudulent activities and shield businesses and organizations from penalties or interest liabilities stemming from erroneous claims propagated by promoters.

The ERC, when legitimately claimed, serves as a refundable tax credit tailored for businesses that sustained employee remuneration amid the COVID-19 pandemic while contending with either full or partial suspension of their business operations due to government directives or experiencing a substantial decline in gross receipts during specified eligibility intervals.

Back in July, the IRS announced a pivot in focus, allocating resources to review ERC claims with a discerning eye for compliance irregularities, intensifying audit efforts and criminal inquiries targeting promoters and entities submitting dubious claims. Presently, the IRS grapples with hundreds of ongoing criminal cases, while thousands of ERC claims have been flagged for audit procedures.

The issuance of 20,000 letters pertains to two primary areas of concern surrounding ERC claims:

  1. Entities not in existence during the eligibility period: The ERC pertains to qualified wages disbursed between March 13, 2020, and Dec. 31, 2021. Entities established after Dec. 31, 2021, are ineligible for ERC as per congressional legislation.
  2. Absence of paid employees during the eligibility period: The ERC serves as a credit against qualified wages remitted. Entities that did not remunerate any wages are ineligible for ERC.

Respecting taxpayer rights, the disallowance letters will elucidate the avenue for taxpayers to contest the disallowance by furnishing substantiating documentation regarding their eligibility or claimed amount, or by pursuing an administrative appeal.

Beyond the immediate denial notifications, these disallowance letters serve multiple beneficial purposes in aiding taxpayers and facilitating efficient tax administration:

  • They prevent ineligible taxpayers from undergoing audits, repayments, penalties, or interest.
  • Safeguard taxpayers against erroneous refunds being funneled to ERC promoters.
  • Conserve IRS resources by precluding erroneous credit claims from entering the audit pipeline.

Moreover, the IRS is formulating plans for additional communications beyond the disallowance letters. Simultaneously, preparations are underway for a specialized voluntary disclosure program tailored to address ERC claims, slated for announcement later this month.

Concurrently, the IRS continues its review of ERC claims and may request supplemental information from taxpayers to substantiate their ERC claims.

The IRS echoes a reminder that there is still a window to retract pending ERC claims. Taxpayers possess the opportunity, extending until at least the year-end, to rescind their claims entirely.

This withdrawal provision extends to employers who have filed an ERC claim but have yet to receive disbursement. Even for those who have received a check but refrained from cashing it, there exists the opportunity to retract their claim. By withdrawing an erroneous claim, individuals effectively nullify its existence, thereby absolving themselves from penalties or interest.

Amidst these developments, the IRS issues a cautionary advisory, urging taxpayers to exercise prudence before initiating ERC claims, particularly in light of aggressive maneuvers persisting among marketers and scammers. Furthermore, for those who have already submitted claims, the IRS advocates seeking counsel from proficient tax advisors to ascertain their eligibility amidst the backdrop of misleading marketing tactics associated with the credit.


For more information on ERC, see the ERC frequently asked questions and the ERC Eligibility Checklist, which is available as an interactive tool or as a printable guide.