The IRS continues to deal with a flood of employee retention credit (ERC) claims driven by scams and false promoters. As a result, they have sent out more than 20,000 letters rejecting questionable ERC claims. We have the details here.

What is the Employee Retention Credit?

The Employee Retention Tax Credit (ERC) is a refundable tax credit based upon qualified wages an employer pays to its employees applied against certain employment taxes (Social Security, Medicare, etc.)

Generally, there are 2 ways to qualify for the credit –

• The 1^st criteria – You experienced a full or partial suspension of operations during 2020 or 2021 because of governmental orders limiting commerce and impacting your business.

• The 2^nd criteria – You had at least a 50% decline in gross receipts in any calendar quarter in 2020 compared to the same quarter in 2019 (20% decline in gross receipts in any calendar quarter in 2021 (or Q4 2020) compared to the same quarter in 2019).

ERC processing halt

Due to a surge in fraudulent claims for the ERC, as of September 14, 2023, the IRS placed an immediate halt on processing any new ERC claims received. This halt will continue through at least the end of 2023.

Withdrawal process

In late October, the IRS announced a withdrawal process for those who filed an ERC claim after being pressured or misled by ERC marketers or promoters. Certain employers that filed a claim and are now doubting their eligibility were given the option to withdraw their submission and avoid future repayment of amounts claimed and assessed interest and penalties.

What’s new in December 2023?

Beginning December 6, 2023, the IRS will be sending 20,000 initial disallowance letters to taxpayers who are deemed ineligible for the credit. The letter, Letter 105 C, Claim Disallowed, aims to help taxpayers avoid audits, interest, penalties and future repayments. The claims that were denied were concentrated in two areas – claims made by entities that did not exist during the ERC eligibility period and claims made by entities that did not have employees during the ERC eligibility period.

What will happen down the road?

The initial round of letters is part of a whole set of steps in the IRS’ compliance plan. They expect to offer a separate voluntary disclosure program later this month, which will allow those who received questionable payments to disclose them and avoid any adverse consequences.

This first round of disallowed ERC claims was focused primarily on claims filed where the entity itself was clearly not eligible for the program based on certain direct eligibility parameters. Eligibility factors that were less direct will become part of the IRS’ target as they continue to review and audit ERC claims. Documenting eligibility with supporting calculations of the claim broken down by employee and payroll quarter is paramount to supporting your ERC filing. If you receive a notification from the IRS about a filed ERC claim the best thing to do is contact your tax advisor.

Questions? Contact us.