IRS Increases Enforcement on Aggressive Employee Retention Credit Claims

The IRS announced enforcement action against dubious Employee Retention Credit (ERC) claims by sending over 20,000 letters to taxpayers notifying the recipients of disallowed ERC claims. This compliance effort results from a review revealing many taxpayers didn’t meet the ERC criteria. Recipients not eligible for the credit will receive Letter 105 C, “Claim Disallowed.”

The ERC is a refundable tax credit designed to aid businesses that continued paying employees during the COVID-19 pandemic, even amid government-ordered suspensions or significant revenue declines. In September, the IRS announced a moratorium on processing ERC claims at least until the end of 2023. For those with outstanding claims, this means a more thorough review and longer processing times. The standard processing goal of 90 days will be increased to 180 days or longer if the claim is subject to further review or audit.

IRS Commissioner Danny Werfel noted that aggressive marketing led to claims that clearly didn’t meet legal requirements. This action is part of a broader compliance initiative, with more disallowance letters and requests for the return of erroneous funds planned.

The IRS has intensified audit work and criminal investigations targeting promoters and businesses with questionable ERC claims, with hundreds of criminal cases and thousands of flagged claims.
The 20,000 letters to taxpayers address two main issues: entities not existing during the eligible period and entities not paying wages. These letters help ineligible taxpayers avoid audits, penalties, and interest, protect against incorrect refunds, and save IRS resources.

Disallowance letters allow taxpayers to respond with documentation or file an administrative appeal if they disagree. Additional letters and a voluntary disclosure program are forthcoming.
The IRS still accepts withdrawal requests for full ERC claims under a special process. This helps those misled into filing ineligible claims by ERC marketers or promoters avoid future repayment, interest, and penalties.