Dec 19, 2023

Employee Retention Credit: What's Happening Today?

In response to misleading aggressive marketing campaigns, the IRS is sending letters to inform the recipients that ERC claims are being disallowed. Read through for the full story on this significant but complex tax break.

Many businesses, their accountants and advisers have been wondering what's happening with the employee retention credit, a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. In recent weeks, the IRS has been focusing on weeding out companies that applied but were not eligible. Copies of Letter 105 C, Claim Disallowed, are on their way. Recipients are being notified that their claims are being disallowed since either the entity did not exist or it did not have paid employees during the period of eligibility.

For those with pending claims who realize that they may have filed an inaccurate tax return, there is an opportunity to withdraw from the program. Those taxpayers who have not yet received any refund have until the end of the year to withdraw their claim. By doing so, they can avoid any future repayment, interest and penalties. Withdrawals are also possible if a check was issued but was not cashed or deposited. Additionally, a voluntary disclosure program will allow those who received questionable payments to avoid any further IRS action.

The word from the top

As IRS Commissioner Danny Werfel tells it, "As we continue our audit and criminal investigation work involving the employee retention credits, we continue to urge people who submitted a claim to review the rules with a trusted tax professional. If they filed an inaccurate claim, we urge them to consider withdrawing their pending claim or use the upcoming disclosure program to repay improper refunds to avoid future action."

As of Sept. 14, the IRS had put a halt on processing ERCs at least until the end of 2023. Those claims submitted prior to Sept. 14 will receive enhanced compliance reviews. This is a crucial step in protecting against fraud and to protect businesses and organizations from facing penalties or interest payments stemming from bad claims touted by promoters. A legitimate claim is a refundable tax credit designed to reward those businesses that continued to pay their employees during the COVID-19 pandemic. The operation of these businesses were fully or partially suspended in compliance with the government order or saw significant losses of gross receipts during the eligible period.

The disallowance letters that identify ineligible claims before they're paid serve several purposes that help taxpayers and tax administration. They:

• Help ineligible taxpayers avoid audits, repayment, penalties and interest.
• Protect taxpayers by preventing an incorrect refund from going to an ERC promoter.
• Save IRS resources by disallowing incorrect credits before they enter the audit process.

During this period, the agency urges taxpayers applying for the ERC to use extreme caution about aggressive marketers and potential scammers. It is recommended they consult with a trusted tax professional about their eligibility.

For more information on ERC eligibility, see the ERC frequently asked questions and the ERC Eligibility Checklist, which is available as an interactive tool or as a printable guide.

©2023