IRS takes firm stance on Employee Retention Credit Claims

Ines Zemelman, EA
Ines Zemelman, EA
• 13.12.23 • 5 min read
IRS takes firm stance on Employee Retention Credit Claims

In a significant move to uphold tax compliance, the Internal Revenue Service (IRS) has initiated a stringent crackdown on dubious Employee Retention Credit (ERC) claims.

This development, marked by the dispatch of over 20,000 disallowance letters to various taxpayers, forms part of the IRS's broader strategy to combat misleading claims and ensure the integrity of the ERC program.

Increased enforcement and compliance measures

The IRS's latest action targets entities that either did not exist or had no paid employees during the ERC's eligibility period. This step is crucial in preventing the distribution of ERC funds to ineligible parties.

The initiative is a direct response to aggressive marketing campaigns that have erroneously targeted small businesses and other organizations with misleading information about the ERC.

The disallowance letters and their impact

As part of this enforcement, the IRS is issuing Letter 105 C to taxpayers deemed ineligible for the credit.

This initial batch of letters focuses on entities that fall outside the basic qualifying criteria for the ERC.

necessity of this action, citing the widespread aggressive marketing tactics that led to many of these ineligible claims.

Moratorium on new ERC claims

In a preventive measure, the IRS has also instituted a moratorium on processing new ERC claims, effective until at least the end of 2023.

This pause is intended to safeguard against fraudulent claims and protect legitimate businesses from potential penalties or interest charges resulting from invalid claims.

Focus on compliance and identified problem areas

The IRS is not only intensifying its audit work but also conducting criminal investigations into promoters and businesses involved in dubious ERC claims.

Two primary issues have been identified: claims from entities not in existence during the eligibility period and claims from entities that did not pay any wages during this time.

Taxpayer rights and options

Taxpayers who receive a disallowance letter but disagree with the IRS's decision have the right to respond with supporting documentation or file an administrative appeal.

Additionally, the IRS has provided an option for taxpayers to withdraw their ERC claims by the end of the year, helping them avoid potential future repayment, interest, and penalties.

Final thoughts and resources

The IRS advises taxpayers to exercise caution before applying for the ERC and to consult with trusted tax pros regarding their eligibility.

For more detailed information, the IRS offers a comprehensive FAQ section and an ERC Eligibility Checklist on its website.

Bottom line

This decisive action by the IRS underscores its commitment to maintaining the integrity of the tax system and protecting legitimate businesses.

By staying informed and consulting with tax professionals, businesses can navigate these changes effectively and ensure compliance with the evolving tax landscape.