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IRS Continues ERC Enforcement Campaign with 20,000 Disallowance Letters

Dec 12, 2023

The IRS is continuing its aggressive ERC compliance efforts, this time by announcing it has sent over 20,000 letters to taxpayers disallowing their Employee Retention Credit claims. The IRS has been ramping up enforcement against potentially erroneous credit claims over the year, which has included releasing guidance on substantiating claims due to supply chain issues and announcing a moratorium on the processing of new ERC claims until at least January 1, 2024. 

Enforcement Efforts

The IRS has been increasing its scrutiny of ERC claims due to aggressive and misleading promotors that encourage businesses to claim the credit. These promotors often target small businesses with promises of thousands of dollars of credits, and typically charge contingent fees based on the amount of credit they deem the business is “eligible” to claim. These disallowances stem from this heightened scrutiny of ERC claims.

Disallowance Letters

The 20,000 letters sent to taxpayers disallowing claims are part of an “initial round” of disallowance letters. These letters are focused on entities that either were not in existence or did not have paid employees during the eligible quarters of the ERC. Taxpayers will receive a Letter 105 C, Claim Disallowed. Taxpayers are advised they will be able to respond with documentation to substantiate their ERC claim or file an administrative appeal if they disagree with the disallowance. 

The IRS states the purpose of these letters is ultimately to help taxpayers and to ease administration. By disallowing an ineligible claim before it is processed and paid, taxpayers can avoid audits, penalties, and interest, while the IRS can avoid expending resources on audits for improper ERC claims. The IRS advised that more disallowance letters would be going out in the “near future,” as well as letters seeking the return of erroneously received ERC payments. 

Efforts to Ease Burdens on Taxpayers

While the IRS is increasing its scrutiny on ERC claims, the agency has also announced other initiatives designed to help taxpayers who may have improperly claimed the credit due to aggressive promotors. The IRS previously announced a voluntary withdrawal program, which allows taxpayers who believe they filed an improper claim to withdraw their pending claim in various situations. These withdrawn claims will be treated as if they were never filed, which will grant taxpayers relief from interest and penalties. The IRS has advised that the voluntary withdrawal program will be open at least through the end of 2023. The IRS also advised that details of a voluntary disclosure program would be released before the end of 2023 for those taxpayers who already received payments for the credit. 

Taxpayers who believe they may be impacted by the increased scrutiny on the ERC should work with a trusted tax advisor to determine what steps they may need to take to either substantiate or withdraw claims. 

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