IRS Cracks Down on Dubious Employee Retention Credit Claims

Published: Dec 20, 2023
by Small Business Editor
In Small Business News
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To ensure the integrity of the Employee Retention Credit (ERC) program, the Internal Revenue Service (IRS) is initiating a comprehensive crackdown on erroneous claims. More than 20,000 disallowance letters are being sent out to taxpayers with disallowed ERC claims. This action targets entities that are either non-existent during the eligible period or without paid employees as part of the effort to curb improper ERC payments.

The IRS’s decision to intensify scrutiny on ERC claims comes in response to misleading marketing campaigns that have targeted small businesses and other organizations. The agency’s current initiative includes a special withdrawal program for those with pending claims who now realize their tax returns may have been inaccurately filed. Additionally, a forthcoming voluntary disclosure program will offer a pathway for those who received questionable payments to rectify their situation and avoid future IRS actions.

Danny Werfel, IRS Commissioner, expressed concern over the aggressive marketing tactics seen around the credit, leading to claims that starkly deviate from legal requirements. “The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received,” Werfel stated.

The IRS emphasizes that the disallowance letters aim to protect taxpayers from audits, repayment demands, penalties, and interest. These letters also prevent incorrect refunds from reaching ERC promoters and conserve IRS resources by intercepting incorrect credits before they enter the audit process.

Taxpayers receiving the disallowance letter, designated as Letter 105 C, Claim Disallowed, can respond with supporting documentation if they disagree with the disallowance. This group of letters focuses on two primary issues: entities not in existence during the eligibility period and those without paid employees during that time.

The IRS has also announced plans for additional letters and is finalizing a special voluntary disclosure program involving ERC claims. This move aims to offer a proactive solution for those who have erroneously claimed the credit.

In light of this development, the IRS is also continuing its moratorium on processing new ERC claims through at least the end of 2023, following concerns about aggressive ERC marketing from tax professionals and others. The agency warns taxpayers to be cautious before applying for the ERC and to consult with a trusted tax professional regarding their eligibility.


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For more information on ERC eligibility, taxpayers are advised to refer to the ERC frequently asked questions and the ERC Eligibility Checklist, available as an interactive tool or a printable guide.

This IRS action reflects a commitment to safeguarding the integrity of tax programs and protecting businesses and organizations from the repercussions of dubious claims. By ensuring only eligible entities benefit from the ERC, the IRS aims to uphold the program’s purpose: to support businesses that continued paying employees during the COVID-19 pandemic amidst operational challenges.

Image: Depositphotos, Irs